Stoic’s portfolio strategy is best positioned for a bullish market.
As a long-only strategy, Stoic’s portfolio will fall during a market correction. Yet the strategy should cut losses quickly, decreasing the depth of the drawdown when compared to manual trading.
It’s important to understand those market corrections are inevitable. They are part of the price discovery process.
And volatility is what drives the returns. Early crypto investors (and even in 2021, anybody interested in crypto is still early) are paid to tolerate this volatility. If crypto had no volatility, no risks of double-digit crashes, then there would be no chances of making the gains.
Still, to soften the blow of market sell-offs and buy crypto assets at discounts, Stoic holds some portion of its portfolio in USDT (a USD-pegged stablecoin) as a hedge.
The USDT hedge would decrease the overall drawdown of the portfolio. And should the market crash, Stoic would also use this money to buy assets at discounts.
How to set Stoic’s hedge?
Users are free to set the hedge to anything from 0% to 100%:
0% in USDT: everything is in risky assets, which maximizes the potential returns but also increases the depth of possible drawdowns.
100% in USDT: everything is in the stablecoin, which makes sense if you think a major correction is around the corner.
The hedge function is also useful for withdrawing profits. Just set the percentage that you want to take out. Stoic will rebalance and you can just withdraw the USDT.
The hedge, however, is not a panic button: it won’t immediately sell everything. That would be the opposite of Stoic’s approach to smart crypto investing.
Any changes to Stoic’s hedge settings are applied within 24-48 hours. The USDT share is then increased in the next rebalancing round.
If this sounds complicated, don’t worry, you don’t have to make this decision. Most users rely on Stoic’s dynamic hedge, which fluctuates based on what the algorithm views as optimal.
When does Stoic’s dynamic hedge change?
Stoic’s hedge doesn’t change often, at most once in 2-3 weeks.
Usually, the dynamic hedge goes up after a prolonged bullish period. More and more new buyers need to enter the market for the prices to continue to go up. The market can’t go up forever without some correction. So Stoic takes some money off the market to protect against that.
And immediately after the sell-off, Stoic would decrease the dynamic hedge, possibly to 0%. This helps it to deploy that USDT to buy crypto at a discounted price and recoup previous losses faster.
Tip: if you’ve put Stoic at the zero hedge and the market crashed, you can add to your deposit and that would also help you to get better average entry prices.