Troy Gayeski, Co-CIO of SkyBridge’s suggestion on how to hedge Bitcoin risk

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The price of Bitcoin, after reaching an ATH of over $58k on the charts, has been on a downtrend over the past few days, dragging BTC below $47k at press time with corrections. Despite the scale of corrections, however, faith in Bitcoin’s market remains strong, especially among institutions. Many have been using Bitcoin in the conventional market to diversify their investments and protect against risk.
Stone Ridge Asset Management LLC is the newest entrant to this list of Bitcoiners. The firm revealed on Thursday its intention to make Bitcoin part of the seven Stone Ridge Diversified Alternatives Fund strategies. This fund would pursue returns, including reinsurance, market risk transfer, Style Premium Investing, and Bitcoin, from various investment strategies.

Although Bitcoin can assist businesses to diversify and maintain a better market place, how do you hedge BTC? According to Troy Gayeski, SkyBridge Co-CIO,

“…in this specific case of Bitcoin, we think it’s a timely trade where you want to be long. You want to be long in size that makes sense given your overall asset allocation. And for us, we’re still primarily long cash flow generative assets tied to housing or distressed corporate credit or low net exposure, long-short equity.”

The game, he said, is to size the expenses, something that, if the thesis plays out, will help traders make a profit. In the opposite, the loss suffered would be tolerable if it does not do so.

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Also, the Skybridge exec said that another way to hedge Bitcoin is to have a portfolio volatility budget depending on the volatility they can handle. He added that,

” …what we’re articulating to clients is, hey, this could be a year where we’re above that target, which has been 4% to 8% We could be 10% to 12%. But if you’re going to make another 500 or 1,000 basis points from a very niche exposure that’s still in the early stages of adoption, we think that’s a great risk-reward, great trade-off.”

Traders may want to recognise Bitcoin’s connection with the conventional stock market and precious metals, apart from other hedging techniques. Lately, it has oscillated between levels of positive correlation and negative correlation. In fact, a poor equity correlation has only recently been reported and can thus serve as a hedge against the stock market.

However, because uncertainty in the Bitcoin market remains strong, traders might want to exercise caution and switch to save themselves from sudden market blows with an alternative strategy.

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