CryptoEducation: Hedging Explained

24.06.2024

In the world of crypto, hedging is a common strategy used to protect against unfavorable price movements — a kind of financial insurance. What is hedging?Let’s say you open a long position (expecting the price to rise), but the market begins to fall.To reduce risk, you can open a short position that balances out the potential losses from the long one. This way, you maintain your original investment while offsetting market fluctuations. When and why is hedging used?Mostly used in medium- and long-term strategies Less common in day trading, which is more speculative Main tools for hedging: futures and options FuturesA futures contract is an agreement to buy or sell an asset at a pre-agreed price on a specific future date. Crypto markets often use perpetual futures — contracts without expiration dates. They: Rely on funding mechanisms (daily payments between buyers/sellers) Allow you to hold a position indefinitely Are extremely popular on crypto exchanges 📈 OptionsAn option gives the buyer the right (but not obligation) to buy or sell an asset at a specific price (strike) within a defined time. It’s a flexible hedging tool, especially in volatile markets. Simple analogy: The apple farmerImagine you're a farmer expecting a harvest in six months.You're worried prices might drop by then. So you agree in advance to sell your apples at a fixed price.Now you're protected — even if prices fall. But if prices rise, your profit is limited. That’s hedging. Key takeawaysHedging reduces risk, not increases profit It comes at a cost, just like insurance If the market moves in your favor, your gains may be lower because of the hedge