Hedging
Hedging means taking an offsetting position so that losses on one holding are partly or fully balanced by gains on another. It reduces risk, but it also reduces potential gains and usually costs something.
The basic idea
A hedge is a bit like insurance. If you hold an asset and fear a price drop but do not want to sell, for example for tax or long-term reasons, you add a position that gains when the price falls. The two positions move in opposite directions, so the overall swing in your portfolio shrinks.
Common tools in crypto are short positions on futures or perpetual futures, buying put options, or simply moving part of the holding into stablecoins, which is a partial exit rather than a hedge in the strict sense.
A worked example
Say you hold 1 BTC, and for this example its price is 60,000 dollars. You open a short perpetual futures position of 1 BTC. If the price drops to 50,000, your coin loses 10,000 dollars of value, but the short gains roughly 10,000, so you are close to flat. If the price rises to 70,000, the coin gains and the short loses about the same amount. You have locked in roughly the current value, minus fees and funding payments.
With a put option instead, you pay an upfront premium. If the price falls below the strike price, the put gains value; if the price rises, you keep the upside and lose only the premium.
What hedging costs
Nothing is free. Futures hedges involve trading fees and funding rates, which can be paid or received depending on the market. Options cost a premium that shrinks over time. And a full hedge removes your upside along with your downside.
Where hedges go wrong
A short hedge on a leveraged account can be liquidated in a sharp rally, leaving your coin unhedged right when you need protection. Hedging one coin with another, such as an altcoin with Bitcoin futures, only works while they move together, which often breaks in a crash. Hedges held on an exchange add counterparty risk: if the platform fails, as FTX did in 2022, the hedge may be worthless.
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Frequently asked questions
Is hedging the same as shorting?
Shorting is one way to hedge. It becomes a hedge when it offsets an existing holding, rather than being a standalone bet on falling prices.
Can hedging lose money?
Yes. You pay fees, funding or premiums, and an imperfect hedge or a liquidated short can leave you with losses on both sides.
Why not just sell instead of hedging?
Selling is the simplest risk reduction. People hedge when they want to keep the asset, for example for tax timing, staking or long-term conviction.
Related terms
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