One of the main fears of merchants when accepting payments in Bitcoin is the volatility of cryptocurrencies.
It is true that volatility is an inherent characteristic of this market. However, there are effective strategies to mitigate it.
One of the most common and efficient strategies among traders of different assets is hedging.
In this article, we will explore the reasons behind cryptocurrency volatility and how we at ElenPAY use hedging to help our clients manage it and minimize their risks.
Where does the volatility of cryptocurrencies come from?
Before delving into hedging, it is crucial to understand the reasons behind the volatility of cryptocurrencies.
Some of the causes are:
- Emerging and developing market: cryptocurrencies are a relatively new technology and market, still in the process of maturing and consolidating. This stage of development leads to greater uncertainty and price fluctuations.
- Lack of regulation and stability: The crypto market does not have the same regulation and stability as traditional financial markets. Although this is improving, it is still susceptible to rumors, news and events that can cause sudden changes in prices.
- Speculation and manipulation: The crypto market attracts many speculative investors looking to take advantage of volatility for quick profits. This, along with the possibility of manipulation by large players, contributes to price volatility.
- Limited size and liquidity: Many cryptocurrencies have a relatively small market size and trading volume compared to traditional financial markets. This makes them more susceptible to sharp price movements.
- Bitcoin’s inelastic supply: In the case of Bitcoin, changes in demand affect its price. Bitcoin creation is defined by the protocol and no one can alter the amount of Bitcoin created. This differentiates it from other assets such as gold, whose supply can increase with the opening of new mines.
- Dependence on technology: Cryptocurrencies depend on blockchain technology, which is still under development. Technical problems, security flaws or changes in the protocol can generate volatility.
What is hedging?
Hedging in the cryptocurrency market is a risk management strategy used to reduce the impact of adverse price movements of an asset.
It is similar to taking out an insurance policy. Insurance policies do not eliminate the risk of, for example, a flood at home. However, they mitigate the financial losses that could occur.
In the financial market, hedging has long been used as a risk management technique. What it does is to maintain a stable value of investments in unfavorable market conditions.
Some common ways to hedge cryptocurrencies include:
- Short selling: allows you to hedge against the downside risk of a long position in either the same or a related security.
- Use of derivatives such as futures and options: These instruments allow you to gain exposure to the price movements of cryptocurrencies without having to own the underlying asset.
- Perpetual swaps: Perpetual swaps are derivatives that allow you to buy or sell the value of an underlying asset without setting an expiration date for the position you take.
- Portfolio diversification: Investing or accepting payments in a variety of cryptocurrencies and other assets to reduce exposure to the risk of a single asset.
Hedging strategies are effective, but they can also be complex and carry their own risks. That’s why it’s important that, as a trader, you have the support of specialists to help you with hedging while you focus on growing your business.
How ElenPAY hedges cryptocurrency volatility
At ElenPAY we know that hedging does not completely eliminate the risk of volatility. However, we work with trusted specialists who ensure that this risk is kept to a minimum. In addition, they assume the risk so that our clients do not have to.
We make the entire complex hedging process completely transparent to the merchant. We take care of the entire Bitcoin management process, from when the client deposits euros until the merchant receives that same amount of euros in their bank account, regardless of when they request settlement.
When choosing a hedging strategy, specialists carefully evaluate the advantages and disadvantages to make sure that the benefits outweigh the cost of such hedging. Although ElenPAY fully assumes this expense, we believe it is important for merchants to understand its value.
Using a trusted Bitcoin payment platform
Despite the volatility of cryptocurrencies, implementing Bitcoin payments with ElenPAY ensures minimal risk.
The close collaboration between ElenPAY and hedging specialists guarantees a secure implementation with minimal volatility. In addition, ElenPAY offers a robust infrastructure with the necessary support to ensure legality and transparency of transactions.
We work to help merchants reap the benefits of Bitcoin payments while maintaining security and regulation. With ElenPAY’s backing, merchants can adopt this innovative payment solution with complete confidence.
Contact us to explore how to implement Bitcoin payment processing – forget the hassle of managing volatility!
Leave a Reply