Hedging to Keep Your Business Revenues Independent of Currency Swings

in #hedging5 years ago

I want to be clear from the beginning that I am not a business or financial adviser of any kind. What I came up with below is based simply on general self-training I have about markets and... logic.

This plan works well whenever revenues are in a currency A and expenses are in a currency B. It doesn't really matter if A and B are both fiat, or one crypto and one fiat. Or a different combination, as long as the following simple plan can be applied.

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Let's say, because we have a recent example and enough businesses in the same situation, that revenues are in crypto and expenses are in fiat money.

Multiple Revenue Streams Solution

One solution many people have stated as a way to keep a business running in unfavorable market conditions, with respect to the price of your revenues currency compared to the expenses currency, is to have multiple revenue streams.

I feel the need to add that it's not enough, at least one of the revenue streams must be directly in the expenses currency, or a currency closely correlated with it. In our case, at least one revenue stream must be in fiat. And that can be a working solution to avoid your revenue currency swings.

Hedging Against Revenues Currency Risk of Depreciation Compared to Expenses Currency

The second solution I see requires more insight into the financial markets, but it doesn't need a secondary revenue stream, as long as the primary one makes the business sustainable, at a certain price of the revenue income currency.

You first need to make sure your business model is sustainable, because what I'm presenting below does not create sustainable business models, it is a protection mechanism against wild fluctuations.

Let's say you have your sustainable business model which has revenues in crypto and expenses in fiat. Furthermore, you calculate that below a certain threshold of the crypto coin you have your revenues in, your business becomes unsustainable, if you were to sell at that price for fiat.

The solution I see is hedging.

According to Investopedia

Hedging against investment risk means strategically using instruments in the market to offset the risk of any adverse price movements. In other words, investors hedge one investment by making another. ... A reduction in risk will always mean a reduction in potential profits.

The definition above mentions hedging against investment risk, which is more broad. We are only interested in hedging two currencies one against the other, to minimize the risk of price fluctuations in unfavorable market conditions.

1. The on-hands approach

What you need is a trading account for your business, where you can operate with fiat, and which accepts short positions on crypto. Before you through eggs, listen up! This is not for profit, this is for hedging, to keep your business sustainable below a certain price of your crypto asset.

You don't want to sell more crypto below the sustainability line. Also, if we're talking of large amounts, small market and a long downtrend, that's an even worse combination. But at the same time you need fiat to pay for expenses.

How do you proceed?

You fund the hedging account with a certain amount of fiat. The more protection you want to have, the higher the amount. Maybe someone who has a more extensive experience hedging can give more accurate indications here.

Use the funds to slowly short the target crypto currency (probably bitcoin for Steem), even before the price hits your sustainability threshold.

This way, if crypto market continues to plunge compared to fiat, you make a profit on your hedging account and use it to pay for your expenses. If, on the other hand, crypto market recovers, you close your shorts at a loss but you can exchange your crypto revenues to fiat above sustainability line.

Don't use leverages even if your hedge account permits it, because on the other side you have your crypto which are real assets and have no leverage.

I called this the 'on-hands' approach because you are involved at every step of the way.

2. The off-hands approach

In this approach, you need to be able to estimate your future revenues.

You also need to be able to open short contracts on crypto (probably bitcoin only for now).

What you need to do to hedge the two currencies against each other is open a short contract on bitcoin of the amount in fiat of your estimated future revenues on the period of the contract. At the end of the contract, the value of your revenues will be set in stone compared to fiat, because you either win on the contract or from the appreciation of the crypto asset.

Let me just add that neither approaches allow you to create a hedge against the fluctuation between the altcoin and bitcoin.

Final Words

Hedging the two currencies one against another is not intended for profit, it is for reducing the influence of prince swings of your revenues currency compared to your expenses currency, especially as the price drops below your calculated sustainability line. Merely a way to minimize risk that should have been or should be considered.

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I am actually buying into Steem to hedge against the U.S. Dollar @gadrian.


The income I recieve largely depends on the U.S. economy and the Global Financial System remaining intact, and without Steem I'd be left with almost nothing should the Global Financial System and USD collapse.

@themoneygps covers some of the reasons why I am bearish about the Global economy. Almost all of the growth in the last decade has been fueled by debt!

And that's wise to hedge against it. But in this post I'm merely talking about hedging one currency against another. It could very well be USD versus Euro. It all depends on the currency in which the revenues come in and the currency the expenses are paid out.

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Yeah. I think it also helps to diversify.

Owning real assets in multiple countries can also act as a hedge, but I haven't tried to short a currency yet.

Thanks for recommending it as an option @gadrian.

P.S. It might have been good for @ned and @steemit to do this before the crash.

I don't know much about real estate, but I think if they are well invested and by people who can handle the maintenance costs, that's a great way to hedge or even to earn a passive income.

Yes it might have been a solution for Steemit. Frankly, at the amounts of money we are talking about mitigating some risks is a must.

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Hello, @gadrian, I don't know much about financial matters either, but all this seems like a good plan to protect investments from the inevitable market fluctuations. Your publication is very interesting and informative, thank you for sharing it. Greetings.

Thank you @aurodivys! Hopefully it helps, or at least gives some ideas from which someone could come up with a better plan.

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