Until proven otherwise, flash crashes should be expected by all crypto traders and investors.
Massive volatility to the downside, also known as a flash crash, is a staple to crypto markets. Yesterday, on September 7th Bitcoin quickly lost roughly 20% of its value in a matter of hours.
“Pour one out for the leverage traders” was my simple and initial thought.
According to CryptoDiffers graphic, pour one out for over 330,000 leverage traders. There was a total of 3 and a half-billion dollars in liquidations reported by ByBit in yesterday’s market slide.
Having used leverage myself and been liquidated, I’m all too familiar with the feeling. Weeks of hard work put in, gains made, all to be given back through poorly managed positions in a singular liquidation event.
Luckily, I only traded leverage with a small amount of funds for practice, but quickly moved on from the strategy given the massive risks involved.
Extreme Market Volatility is Guaranteed
Until proven otherwise, flash crashes should be expected by all crypto traders and investors. Keeping this in the back of our minds as decentralized finance investors can help us form strategies that not only brace us for impact, but also provide investment opportunities in the future.
The following is a short list of ways defi investors can prepare and plan for extreme market volatility:
- Keep Cash On the Sideline
There is a bit of a meme in the crypto-sphere that cash is trash and we should be completely all in on Bitcoin and other digital assets. While the market crash this week was brutal, we’ve seen far worse, and investors with deployable capital can reap the rewards donated by our fallen leverage trading brothers. Being able to quickly buy the dip on a flash crash can lead to 20+ percent gains quickly in spot positions. You may not be able to always time the market, but keeping some bids open on seemingly out of reach targets is a strategy traders can use to take advantage of major market corrections.
- Don’t Use Leverage
This one is straightforward, but often needs to be thrown out there as a reminder. Trading with leverage is incredibly difficult, and most traders will lose. If you don’t consider yourself to be a top trader (I certainly don’t), you should probably stay away from leverage.
- Hold LP’s With a Stable Coin on One Side
Providing liquidity to markets such as BTC:BUSD or BNB:BUSD will sacrifice some upside, but also protect you on the downside and bring your portfolio some stability. These liquidity positions also tend to pay pretty solid yields, often in the 20% range. This is better than you could get on both Bitcoin or BUSD as stand-alone assets. I happen to have most of my portfolio in BTC:BUSD, ETH:BUSD, and BNB:BUSD, so while the drop hurt, my portfolio value only felt about 50% of the market move. At the same time, I continued collecting trading fees and liquidity incentives further padding my fall.
- Be Patient
The saying goes, when in doubt, zoom out. Bitcoin may have dropped rapidly but settled into a price not seen since last week. The asset is also still up nearly 50% over the past couple of months. Similarly stated earlier, as crypto investors we know that market volatility is part of the deal, and we should always be ready to see the worst happen. During the latest crash, I watched the price tank, saw my notifications light up, and then went back to work – My LP’s are still hard at work and I’m here for the long haul.