The question those of us who’ve been around crypto for a while get asked most often is “will crypto crash again?” and the honest and simple answer is yes, at some point it will.
Crypto markets are exceptionally volatile, generally more so than traditional stock markets. Even worse, crypto crashes can happen at any time, and even the most hardened trader needs to tear their attention away from their screen at some point and go and get some sleep.
In the past, there have been three main ways in which traders protect themselves from downturns: Manual selling, using stop losses and Options trading, all of which carry significant inherent risks, and which can end up leaving you even more out of pocket.
Fortunately, there is another alternative to help you survive (and even thrive) during a crypto crash, and we shall come onto that shortly, but first let’s explore the traditional methods used by crypto holders to minimise losses when the crypto market crashes.
Charting enthusiasts often spend hours glued to their screens, watching candles ticking by, and trying to find entry and exit points. Whilst this is often quite common in the traditional world, there is an inherent bigger problem making manually setting sell orders in the crypto world. It’s called sleep.
Unlike the trad-fi stock markets, which have clear opening and closing times, cryptocurrency markets run all day, every day, and they don’t stop even on public holidays. This means that unless you are watching your screen 24/7 every single day of the year, it is almost guaranteed that you are going to miss at least some of those rips and dumps which happen all too frequently in the crypto space.
Then there is of course the issue that no matter how good you think you are at technical analysis, weird things do happen in markets, and even the most experienced traders can get caught out and end up losing on trades.
This is especially true when you consider that a huge amount of crypto trading is done by bots, which operate to programmed algorithms, and no matter how fast you think you are, you’re never going to beat the bots when it comes to high frequency trading.
So, unless you enjoy playing a game of Brewster’s Millions with your crypto, manually selling is really not at all a great way of ensuring you maximise your gains and minimise your losses.
By now, you may have come across the infamous stop loss, which is a feature of mostly centralised exchanges.
Using a stop loss is simple, essentially it allows you to set a limit at which a sell order is automatically placed on the exchange when the price of your asset falls below a certain level.
Usually, if the stop loss is triggered, you would be exchanging for either fiat currency or stablecoins.
So far, so good, a stop loss is a simple way of getting out if there is a market crash, and if the price keeps on falling, you can wait for a good entry point, and now you have plenty of cash or stablecoins to buy even more crypto.
However, if the price happens to rise again, just after your stop loss is triggered, you’re now sitting on either fiat or stablecoins which are worth less than what you would have had if the stop loss hadn’t triggered.
In this case, you would have been better simply sitting on your original crypto, and just riding it out. But of course, you weren’t to know that this is what the market would do.
To make it even more complicated, bigger players will go ‘stop loss hunting’, in other words, they want to drop the price low enough to trigger stop losses, and then they buy up your cheap crypto, pushing the price back up again and profiting handsomely in the process.
Furthermore, in order to use a stop loss, your crypto must be moved to an exchange, meaning firstly that you are no longer in control of your asset. You also cannot use your asset to earn yield through staking, and thus miss out on passive income.
So whilst stop losses are useful tools for day traders, they can be quite dangerous for long term holders.
The Options market is a financial derivative, widely used in the traditional stock market.
In brief, there are two types of Options contracts, the first being a ‘Call’ and the other being a ‘Put’, both of which have a strike price and an expiration date, with traders paying a premium to buy these contracts.
Buying Puts is a way for traders holding an asset to hedge against volatility, as effectively, this is a bet placed that the price of the asset will be below the strike price on the expiration date.
If this happens, then the trader has the option (but not the obligation) to sell 100 units of the asset at the strike price (which of course is higher than the current price), or again to simply pocket the difference. This essentially provides some returns in the event that the asset they are holding loses value.
However, Options desks are pretty complicated, and it takes a great deal of practice not to end up losing all your money. For this reason, Options are definitely not recommended for new traders, especially so when using leverage (effectively borrowed money) which multiples potential profits, but conversely also multiples potential losses, significantly.
Furthermore, whilst there are a few centralised crypto exchanges which do offer Options trading, access is sometimes restricted to larger accounts, due to the complexity of this market, and this means that many retail traders do not even have access to Options desks.
Bumper is an innovative DeFi protocol which provides protection from downside volatility, ensuring that users don’t miss out on the upside should the market rebound and rip higher.
In the Bumper protocol, Takers are users who wish to protect their crypto from downside volatility, and Makers are users on the other side who provide liquidity to the protocol, and are rewarded for assuming some level of risk.
Takers and Makers are not paired with one another, instead both sides are lock either their crypto asset (e.g. ETH in the case of Takers) or their stablecoins (e.g. USDC in the case of Makers) into pools controlled and managed by smart contracts.
If the price of a protected asset drops below the floor, the Takers receive either stablecoins to the value of the floor (minus the premium) OR their original asset, but only when the contract is closed.
Whilst a Taker has an asset being protected, they are returned a unique digital asset which has a guaranteed price. This asset is called a Bumpered asset, and one of the many brilliant features of a Bumpered asset is that being an ERC-20 token in its own right means it can be traded, or used for collateral in other DeFi protocols.
For example a Bumpered asset could be used to provide collateral for a loan, but without the threat of forced liquidation, thanks to the inherent minimum value of the Bumpered asset.
On the other side, Makers are liquidity providers who lock up their stablecoins into one of Bumper’s Capital Pools, and thus earn premiums in return for assuming some risk.
An important concept to grasp here is that the Capital Pools do not require all the stablecoins locked in them to be immediately available for paying out to Takers whose positions close under their floor.
In fact, in many cases, assets which do drop under the floor often rebound again, back above this level, and thus these Takers would simply have their original asset returned at the expiry of their protection term.
This means a substantial portion of the Capital Pool can be automatically invested into external yield farming contracts, with these earned yields being enjoyed by the Makers on top of the premiums they earn from Taker positions.
Makers therefore have the potential to generate a greater return than they would if they were spending time manually finding and selecting yield farming opportunities, making Bumper a highly attractive and simple option for those looking to earn passive income on their stablecoins, and this is all done for them on Autopilot.
There’s a lot more to Bumper too, and it’s highly recommended to read the protocol’s Flashpaper, which provides a fairly simple overview of how Bumper works, or the Litepaper, which delves deeper into exactly how the protocol works.
Finding ways to protect your crypto investments from downside volatility is not without risk itself.
Stop Losses do protect you from market crashes, but can sting if the market rebounds, and Options are very complicated and really only recommended for highly experienced traders.
Bumper on the other hand is a DeFi innovation, a provably fair and fully decentralised protocol which provides both protection from price drops, and simultaneously allows market makers to generate returns from Taker premiums and automated yield farming.
Want to find out more about how Bumper protects your wallet from the dreaded crypto market crash? Have a look at this handy summary of the Bumper protocol here.
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In this article, we compare using Bumper with Put Options and examine its advantages for DeFi traders wanting to trade volatility with more flexibility.
