Despite the notion that portfolio hedging is a preserve for institutional investors, Robby Greenfield, the CEO of Umoja Labs, says even retail investors can use well-known techniques to insulate their crypto portfolios against sudden and steep price swings. The CEO however concedes that many retail investors have not engaged in hedging because such tools have not been accessible to them.
Ways Retail Investors Can Hedge Against Losses
Greenfield, a Goldman Sachs alum, asserts that without hedging, retail investors will be at the mercy of crypto hedge funds and whales known to “sell their losses to retail investors.” According to Greenfield, retail investors can use simple and automated ways to shield their portfolios.
In addition to the risk management techniques made possible with decentralized finance (defi), retail investors can also ensure that the protocol they are using is audited by high-quality firms. Similarly, reading the technical documentation of a protocol can help retail investors avoid losing money.
In his responses sent to Bitcoin.com News, the Umoja Labs CEO also explained why most hedging strategies are ill-suited for retail investors and the steps his firm is taking to make portfolio hedging easier. Below are Greenfield’s answers to the questions sent.
Bitcoin.com News (BCN): In the last bear market, investors reportedly lost almost $2 trillion as value eroded due to negative sentiments, scams, hacking, regulatory pressure, exchange collapses etc. What do you think are some things crypto investors can do to minimize the risk of incurring such steep losses?
Robby Greenfield (RG): The first is to not ever forget, that bull markets only last a very short amount of time, and that there are many external forces, such as traditional institutions, that will try to manipulate the market against retail investors. This has always been a fact with traditional finance, and it is no different within the cryptocurrency markets. In order to defend against this risk, you have to be able to hedge your risk. You have to be able to take the emotion out of your trading to secure your principal when things are going well, and protect when things are going poorly. Now such risk management has become possible in defi as well.
The second is the platform or protocol that you were transacting on in the first place. It is a well-known fact that both exchanges and protocols have certain risks. Centralized exchanges have exchange failure risk, in which either the custody of user funds is exploited or the organization itself is being fraudulent. We have seen this with FTX, Mt Gox and many others.
Regarding protocols, you need to make sure that the protocol is audited by high-quality firms, and that it has a history of holding and/or securing a great deal of capital. Even though it is inconvenient at times, reading the technical documentation of a protocol can be the difference between you losing all the money that you have, and making a little bit more.
BCN: Many crypto investors seem to have this perception that crypto hedging is only for the big funds and institutions. In your opinion, why have retail traders and investors not embraced hedging as a risk management strategy?
RG: The reason retail investors haven’t engaged in hedging is because it hasn’t been accessible to them. Imagine trying to manually trade 24/7 to combat against the market. Volatility of crypto. It’s damn near impossible. Yet, all of the institutions do this, and it’s been proven by the Bank of International Settlements that crypto hedge funds and whales sell their losses to retail investors – just like big banks do in traditional finance.
For the first time ever retail traders can leverage hedge fund like strategies and extremely simple and automated ways. There will come a time in defi, where an individual can access Goldman Sachs level asset management by just holding a token – that’s where finance is going. Umoja realizes this world and simplifies protecting against losses and locking in gains for everyone.
BCN: What are different hedging strategies in crypto and how do they differ from traditional finance’s approach to hedging, if at all? What options do traders have for protection against possible liquidations and volatile market prices?
RG: Traditionally, options are used to hedge against market risks. Of course, there are also swaps, futures and forwards, but each of those derivatives only works in certain contexts. It is very common in traditional finance for hedging to be a part of any sophisticated asset management strategy. Aside from derivatives that can be used to hedge against risks, asset managers leverage diversification and dollar cost average strategies as well.
The issue here is that all of these solutions are not retail-friendly. As much as I love the derivative markets, very few people can tell me that they look at Deribit and understand what’s going on. That’s because it wasn’t designed for retail in mind.
BCN: Your platform Umoja claims to enable investors large and small to effortlessly hedge their crypto trades. Can you explain what Umoja does and how this simplifies hedging for the retail crowd?
RG: Umoja condenses quantitative trading strategies into an extremely user-friendly interface. In the background, we leverage perpetual futures trading to replicate options. Effectively, Umoja is the “ditto of finance.” Ditto is a Pokémon that can transform into any other Pokémon. Basically, it’s a shapeshifter. Umoja offers strategies known as “Synths” to replicate safer, more automated, and more flexible asset management. Synths are the building blocks of creating smart money.
If you were to look into your crypto wallet or bank account today, what you would see is dumb money. What I mean is, the tokens and fiat currency that you hold do not work on your behalf and most of the time, don’t protect you against market volatility. Even when they generate yield, they do so at a constant or declining rate. The future of money is one where your crypto actually works for you. It trades itself. It protects against market volatility. It optimizes yields.
In order for this future to become a reality, sophisticated trading strategies that are facilitated either automatically or manually by the world’s biggest banks and hedge funds need to become composable, so that they can be embedded within existing assets or new ones. That way, a retail investor does not have to rely on decades of financial literacy to get ahead and create wealth. All they need to do is buy a token.
BCN: Cryptocurrency is known for its unexpected volatility. Even the most prominent coins can experience significant fluctuations based on rumors, platform performance, or seemingly without reason. Continual hedging can become costly. When and how should speculative investors move beyond the perception that hedging is mundane and manage their exposure to an asset?
RG: You’re absolutely right. The general sentiment is that hedging is rather boring. However, we have come to learn that you shouldn’t think of hedging as protecting against risk. You should think of it as locking in your gains. In fact, it’s a great way to make money when the market is going down. For example, last week when the cryptocurrency market went down around 15%, one of our users earned $30,000 in just a few days. They didn’t earn this money because bitcoin went up, they earned this money because they had a hedge against bitcoin and ethereum going down.
BCN: What is zero-loss staking and how does it work in the context of hedging one’s positions?
RG: Zero loss staking is a new token model we are working on and a perfect example of what smart money is. If we were to take two building blocks, the first being a synthetic perpetual put option and the second being stETH, and we put them in a smart contract to create a new token called ustETH, we would have created a token that protects against ETH falling in price AND generates staking yield. This is undeniably better than just stETH. Just imagine – we can create an infinite array of new smart tokens doing this exactly like this.
