How To Make Money When Crypto Crashes

You can generate crypto returns during market downtrends through hedging with derivatives, optimizing yield strategies, exploiting arbitrage opportunities, investing in outperforming alternative assets, or employing dollar-cost averaging for long-term growth.

• Hedge spot holdings with 1x leveraged perpetual shorts to collect funding fees in delta-neutral positions.

• Utilize staking and lending protocols to earn yield on crypto assets that would otherwise sit idle.

• Look for arbitrage opportunities during market chaos and consider outperforming altcoins or other asset classes, or hold cash for optionality.

Even when the crypto market is crashing, there are several strategies to generate returns or improve portfolio performance. These methods include using shorting with perpetual futures to hedge existing holdings and collect funding fees, leveraging yield strategies like staking and lending for idle assets, capitalizing on arbitrage opportunities that arise from market inefficiencies, and strategically buying other rallying asset classes or outperforming altcoins. For long-term investors, dollar-cost averaging into foundational assets like Bitcoin and Ethereum remains a time-tested approach to mitigate psychological biases and accumulate during downturns.

Hedging with Derivatives

• 00:00:49 Hedging with derivatives, specifically shorting perpetual futures with 1x leverage, allows investors to generate returns without directional exposure. This strategy involves holding spot assets while simultaneously shorting an equivalent amount on perpetual futures. The main benefit comes from collecting funding fees, which longs typically pay to shorts in crypto, especially since funding often stays positive even during downtrends, creating a delta-neutral position that profits from these payments. However, funding rates are variable and can turn negative, and extreme market stress can lead to auto deleverage (ADL) events.

Yield Strategies

• 00:06:18 Actively utilizing idle crypto assets through yield strategies can boost returns during downtrends. Native staking for assets like ETH provides protocol rewards for securing the network, while liquid staking offers a usable receipt token for further DeFi activities, though it carries liquidity and peg risk. Crypto lending on platforms like Aave allows users to deposit assets and collect interest payments, offering a battle-tested and robust way to earn on holdings, even if APYs tend to be lower in drawdowns. Both methods provide income when markets are otherwise red, but still carry protocol and oracle malfunction risks.

Arbitrage & Relative Strength

• 00:09:23 Arbitrage opportunities arise in chaotic markets when the same asset is priced differently across venues due to panic selling and liquidity variations, allowing traders to buy cheap and sell for more. Stablecoin de-pegs in DeFi also create opportunities to profit as centralized exchanges maintain a dollar peg while on-chain prices temporarily dip. Additionally, during BTC downtrends, certain altcoins or other asset classes like gold may rally, offering long opportunities for shorter-term trades. Maintaining cash as a position is also crucial, offering optionality during panicked or unclear market conditions, as exemplified by Warren Buffett’s strategy.

Dollar-Cost Averaging

• 00:15:02 Dollar-cost averaging (DCA) is a time-tested long-term investment strategy where a fixed dollar amount is bought on a fixed schedule, regardless of price, smoothing the average cost over time. This approach mitigates the psychological challenge of buying during market downturns, preventing panic selling and fostering conviction. For DCA, it is advisable to focus on foundational assets like BTC and ETH, as many altcoins may not reclaim previous highs. Strategies can be automated or tweaked with methods like value averaging or threshold DCA, but pacing capital, setting invalidation points, and zooming out for long-term perspective are crucial for success.