When times are good, risk-off is crypto’s default setting. Max the leverage, ape into memecoins, farm in pool 2 and let the chips fall where they may. During bull markets, this “left curve” approach has proven to pay dividends. But when things go bad in crypto they go really bad, and as the class of 2022 will attest, last year was the industry’s annus horribilis.
The implosion of Terra, FTX, 3AC, Celsius et al, which caused a domino effect that took out major players across the board, has been well documented. One year on from the blast and the after-tremors are still being felt. With little new money entering the markets, crypto has entered PvP mode in which the remaining survivors fight it out for the spoils. Within this adversarial environment, wealth preservation is key. As a result, many traders have begun to address something they once overlooked: risk management.
Traders Buckle Up for a Bumpy Ride
If there’s one word that describes the crypto markets this year, it’s uncertainty. Bullish catalysts, such as BlackRock’s quest for a Bitcoin ETF, have had to be countered with a sluggish macro outlook. Any time bitcoin’s rallied, such as on the news of Grayscale winning its appeal against the SEC, the gains have been slender and short-lived. Balanced somewhere between bull and bear, crypto isn’t quite sure where it stands right now, and the endless crabbing has prompted traders to take better care of their remaining capital.
Sponsored
This cautiousness can be seen in a variety of ways, such as the return to buying majors like BTC and ETH, with altcoins now seen as riskier bets. In a post-FTX world, traders have also become choosier about which exchanges they trade on. Whereas in the post, those that shunned KYC were attractive to risk-on traders, this policy has come to be seen as a warning signal. Today’s traders are more apt to seek sanctuary in platforms that know their customers and whose customers know their funds will still be there when they wake up in the morning.
Chasing Calm Amidst the Storm
During spells of relative quiet for the markets, there’s still money to be made without risking it all through recklessly high leverage. Increased demand for crypto options contracts suggests astute traders are betting against volatility. Using call or put options provides a way to speculate on the future price of assets such as BTC without the threat of liquidation due to a sudden “scam wick.”
Make no mistake, the market still retains its share of reckless traders, speculating on microcap memecoins launching on L2s every second of the day. But for more seasoned traders, the need to implement greater risk management has come into sharp focus, heightened by recent scares such as stablecoin protocol Curve’s liquidity crisis. The $70M hack on Curve exposed cracks in DeFi’s armor and has threatened the security of the entire onchain lending and borrowing landscape.
Sponsored
It’s unsurprising, then, that in this risk-averse environment, there’s been an uptick in crypto users seeking solutions that promise greater asset security. Risk management platform Libertify, for example, has reported strong demand for its AI audit. The service allows crypto investors to assess their portfolio risks and to receive optimization suggestions aimed at minimizing risk. The reduction of risk, even when powered by AI, may not be the stuff that high-octane thrills are made of, but in the current climate, it can be one of the smartest decisions a trader makes.
Caution remains the watchword for now as crypto holders adapt to the uncertain times the market has been undergoing in H2. All that could change in an instant, of course, should a major driver such as Bitcoin ETF approval send digital assets skyward. If that occurs, risk reduction will go on hiatus as traders return to betting on bitcoin and the long tail of crypto assets that follow in its wake.
