How to boost your crypto returns even when markets are red and volatility runs high
When the crypto market is crashing, watching your portfolio get smashed feels inevitable. But bearish trends don’t have to mean losses. In this article, you’ll learn five actionable strategies to profit or at least reduce damage during crypto downtrends. From hedging with derivatives to yield farming, arbitrage, and dollar cost averaging, we’ll cover practical insights every investor should know before the next market plunge hits.
1. Hedge Smartly with Perpetual Futures to Collect Funding Fees
One common way to protect your holdings during a downtrend is shorting BTC or other assets using perpetual futures contracts.
Instead of blind shorting, consider a hedged approach:
- Suppose you hold 5 BTC but expect the price to drop.
- Open a short position of 0.5 BTC on perpetual futures with 1x leverage.
- This flattens your net exposure, allowing you to profit if BTC falls, while your spot holdings gain if BTC rises.
What about generating returns from this neutral stance?
Here’s the hidden edge — funding fees. Funding fees are payments exchanged periodically between longs and shorts to keep perpetual futures prices close to spot.
- When perpetual futures trade above spot, longs pay shorts a funding fee.
- Typically, crypto markets have positive funding (longs pay shorts), enabling hedged shorts to earn small, steady returns over time.
- These fees average around 0.01% per funding interval but can fluctuate.
Because perpetual futures have no expiry, you avoid the timing stress common with quarterly futures or options. You can hold the hedge as long as it pays.
Investment Takeaway: Use perpetual futures short positions at low leverage to hedge spot holdings and collect funding fees during market downtrends.
Answer Box: What are funding fees in crypto futures?
Funding fees are periodic payments exchanged between longs and shorts in perpetual futures markets to keep futures prices close to spot prices. Positive funding means longs pay shorts; negative means shorts pay longs. This mechanism allows hedged traders to earn or pay a small carry cost depending on market sentiment.
2. Boost Yields by Staking and Lending Your Crypto Assets
Instead of letting crypto assets sit idle during bearish phases, put them to work through staking or lending.
- ETH Staking: You can stake ETH on networks or via decentralized services like Lido Finance, earning around 2.6% APR by helping secure the network.
- Liquid Staking Tokens: Lido issues staked ETH tokens (stETH), which accrue rewards and remain usable in decentralized finance (DeFi) protocols for further yield layering.
- Crypto Lending: Platforms like Aave allow you to supply assets to borrowers in exchange for interest. During drawdowns, yields may fall as borrower demand wanes, but it still beats zero returns.
Data Callout: During the October 10, 2022 liquidation cascade, Aave processed $180 million worth of automatic liquidations without pausing, showing its robustness.
Risk Note
Beware liquidity and peg risk with liquid staking tokens. For example, staked ETH tokens traded at discounts during volatile market stress in 2022, causing some users to face forced liquidations.
Investment Takeaway: Staking and lending increase returns on assets you intend to hold through downturns but manage risks by choosing battle-tested protocols.
3. Exploit Arbitrage Opportunities When Markets Get Chaotic
Market chaos often creates price discrepancies for the same asset across exchanges. Arbitrage means:
- Buying the cheaper asset on one platform
- Selling at a higher price on another
- Capturing the price difference as profit
Particularly after major liquidation events, stablecoins might trade below $1 on-chain but near $1 on centralized exchanges, creating short windows of profit.
Execution Challenges:
- Centralized exchanges may face outages during these volatile times.
- Gas fees spike on chain, eroding profits.
- Slippage and competition can reduce viable opportunities.
Pro Tip: Keep funded accounts ready on at least one centralized and one decentralized exchange per chain. Prepositioning capital lets you pounce immediately when spreads appear.
Investment Takeaway: Arbitrage requires preparedness and quick execution but offers some of the easiest short-term profits in volatile markets.
4. Rotate Into Other Assets or Seek Outperforming Altcoins
The old investor adage holds true: “There’s always a bull market somewhere.”
If crypto suits a risk-off mode, look at other asset classes like:
- Gold, which hit all-time highs during recent crypto slumps
- Tokenized stocks or commodities offered by DeFi protocols or exchanges
Within crypto, some altcoins may outperform BTC and post green days amid broad downtrends. Look for:
- Cryptos holding higher lows on red days
- Assets displaying relative strength versus peers
Important Notes
- Altcoin outperformance rarely lasts very long; consider short-term trades
- Cash is a position too. Warren Buffett’s Berkshire Hathaway famously holds record cash (~$350B), preserving optionality.
Investment Takeaway: Be flexible and diversify exposure across asset classes or strong altcoins—just size positions cautiously and avoid chasing prolonged rallies.
5. Use Dollar Cost Averaging (DCA) for Long-Term Accumulation
DCA means buying fixed dollar amounts regularly, regardless of price, smoothing your average entry and taking emotion out of timing.
- DCA shines over months or years, not for short-term gains during crashes.
- It helps avoid panic selling and enforces discipline.
- Best applied to market leaders like BTC and ETH, which have robust fundamentals and long histories.
- Automate DCA schedules via exchanges to stay consistent.
Advanced Tweaks
- Value Averaging: Adjust buy amounts based on target portfolio value paths.
- Threshold DCA: Increase buys when prices drop a set percentage, reduce when they rise.
Investment Takeaway: For patient investors, systematic DCA can build positions in core assets cheaply over time, turning bearish phases into future profits.
Risks and What Could Go Wrong
- Funding Fees Flip: Funding can turn negative unpredictably, turning carry into a cost during extreme bearish spells.
- Counterparty Risk: Using unstable or untested platforms can result in losses or liquidations.
- Liquidity & Peg Risk: Staked tokens or leveraged yield positions might lose peg or be force liquidated under stress.
- Execution Risk: Arbitrage needs fast execution; delays or high fees can wipe profits.
- Market Uncertainty: Altcoins may never recover peaks. Diversification and careful sizing are essential.
- Psychological Risk: DCA requires discipline; abandoning mid-way can lock in losses.
Actionable Summary
- Hedge spot holdings with low-leverage perpetual futures shorts to collect usually positive funding fees.
- Stake or lend assets like ETH on battle-tested platforms for steady yields amid downturns.
- Keep capital ready across exchanges to capitalize on arbitrage during high volatility.
- Rotate into other assets or strong altcoins showing relative strength—mind position sizes and time horizons.
- Employ dollar cost averaging for long-term accumulation in core assets, automated if possible.
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FAQs
Q1: What is the basis trade in crypto futures?
The basis trade involves hedging spot crypto holdings with short positions in perpetual futures to capture the funding fees, often earning returns even in sideways or down markets.
Q2: How risky is staking ETH or using liquid staking tokens?
Staking ETH is generally safe, but liquid staking tokens can lose peg during stress, risking losses or forced liquidations. Use them cautiously and avoid overleveraging.
Q3: Can I profit from arbitrage in crypto easily?
Arbitrage is profitable but requires fast execution and pre-funded exchange accounts. High network fees and exchange outages can eat profits or cause trade failure.
Q4: Why use dollar cost averaging in crypto?
DCA reduces emotional buying, smooths entry price over time, and helps build positions during volatile down markets without chasing bottoms.
Q5: Is shorting crypto recommended in bear markets?
Shorting can protect or profit during downtrends but carries risk, especially due to funding fee variability and possible exchange deleveraging events. Manage exposure carefully.
This article is educational and does not constitute financial advice. Crypto markets are volatile; always conduct your own research and manage risk prudently.
By Wolfy Wealth - Empowering crypto investors since 2016
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Disclosure: Authors may be crypto investors mentioned in this newsletter. Wolfy Wealth Crypto newsletter, does not represent an offer to trade securities or other financial instruments. Our analyses, information and investment strategies are for informational purposes only, in order to spread knowledge about the crypto market. Any investments in variable income may cause partial or total loss of the capital used. Therefore, the recipient of this newsletter should always develop their own analyses and investment strategies. In addition, any investment decisions should be based on the investor's risk profile
