In search of cryptocurrency hedging solutions
Someone stopped by my Fiverr hedging gig the other day shopping for a Bitcoin hedging solution. He described himself as a digital currency dealer. After I explained that my exposure to digital currency (or so-called cryptocurrency) was slim to none, I agreed to investigate further to see if I could help him. After all, traditional hedging concepts should apply regardless the currency.
I embarked on a crash course on crtypocurrency. Bitcoin and its cousin rivals such as Ethereum and Litecoin represent a growing trend to implement currencies that work well with today’s digital commerce. These digital currencies seek to avoid government interference, precious metal backing, and other traditional currency entanglements. After my jet-ski tour of the subject, I traded thoughts with my potential client. We concluded that the markets and the currencies were not mature enough to allow for a hopeful hedge.
Our “cryptocurrency waltz” was a reminder of some significant considerations when hedging any type of commodity price risk. While bitcoin may have received some bad press due to Internet banditry, trading exchanges gone belly up, and the new currency’s “Wild West” feel, that doesn’t mean that it is going away anytime soon. To the contrary, CME Group began tracking it in November 2016, a telltale sign that the currency is gaining legitimacy. If it continues to catch on, then an adequate hedging tool for it is as important as having one for the US Dollar, coffee, corn, or gasoline.
To understand why we concluded it was not yet time to hedge Bitcoin price risk, see this separate blog post that explains five hedging issues for thinly traded commodities.
Future considerations for hedging cryptocurrency
If you own some currency price risk pertaining to a digital currency like Bitcoin and you aren’t speculating on favorable price changes, then I suspect you’ll conclude, like we did, that it’s still early in the game to find an adequate hedging solution. However, one may be coming down the road at the same speed as the growth of these digital currencies. Hang in there. Your patience will be rewarded.
CME Group’s tracking of an index for Bitcoin bodes well for the prospect of a futures contract at a later date. US-based CME Group is the largest exchange for hedging instruments in the world, offering contracts in most commodities. It has time-tested measures in place to protect market participants and may provide more comfort than today’s Bitcoin hedging alternatives. Regardless, always do your homework on possible trading partners before trading with them.