Hedging is a financial risk management strategy that protects capital from unfavorable price movements, exchange rate fluctuations, interest rates, or other market factors. Essentially, it is 'insurance' against potential losses. Hedging is used in both traditional finance and cryptocurrency markets.
How does hedging work?
Imagine you own Bitcoin and are afraid its price will fall. To protect yourself from this, you open a position that will profit in case of a BTC drop. If the forecast comes true, the loss from the underlying asset is offset by income from the hedge. If not, you lose some funds on the insurance but keep the main position.
Main tools for hedging
1. Futures and options
- Futures: A contract to buy/sell an asset at a fixed price in the future.
Example: If you own ETH and expect a drop, sell a futures contract on ETH. When the price drops, the loss on ETH is offset by the profit from the futures.
- Options: The right (but not the obligation) to buy/sell an asset at a certain price.
Example: By buying a 'put' option on BTC, you hedge against a decline in its value. If the price drops, exercise the option and minimize losses.
2. Swaps
- Exchanging assets or payments under previously agreed conditions.
Example for the crypto market: Exchanging a volatile token (e.g., SOL) for a stablecoin (USDT) during market instability.
3. Portfolio diversification
- Diversifying funds among different assets (cryptocurrencies, stocks, gold, real estate) to reduce dependence on one market.
4. Stablecoins
- Converting cryptocurrency to stablecoins (USDT, USDC) when expecting a market drop. This is the simplest way of hedging in the crypto sphere.
5. Short positions
- Selling a borrowed asset with the aim of buying it back cheaper later.
Example: You borrow 1 BTC at $70,000, sell it, and after the price drops to $60,000, you buy it back and return it to the lender, locking in a profit of $10,000.
Examples of hedging
1. Protection against Bitcoin decline
- You have 1 BTC ($70,000). You buy a 'put' option with a strike price of $65,000. If BTC drops to $60,000, you sell it for $65,000, limiting your loss to $5,000 instead of $10,000.
2. Hedging currency risks
- A company from the EU buys equipment in the USA for dollars. To protect against the rise of the USD/EUR exchange rate, it enters into a forward contract to buy dollars at a fixed exchange rate.
3. Crypto-staking + stablecoins
- You stake ETH (earning a 5% return), but keep part of the portfolio in USDT to quickly react to market fluctuations.
How to use hedging: steps
1. Identify the risk: What threatens your portfolio? A drop in the asset price, currency fluctuations, inflation?
2. Choose a tool: Futures, options, stablecoins — what is more convenient and available on your Binance platform
3. Calculate the hedge volume: Usually, 50–100% of the position is hedged. Over-hedging can reduce potential profit.
4. Monitor the market: Close the hedge when the risk passes. For example, if BTC starts to rise, close the short position.
Pros and cons of hedging
1. Advantages
- Reducing losses during market crises.
- The ability to hold long-term calmly.
- Protection against volatility and force majeure.
2. Disadvantages
- Fees for using the tools.
- Complexity for beginners (especially options).
- Risk of calculation errors (e.g., over-hedging).
Tips for beginners
- Start with simple methods: converting to stablecoins or diversification.
- Use demo accounts on exchanges (e.g., Binance Futures testnet) to practice.
- Avoid excessive hedging — it can 'eat' your profit.
Hedging is not a guarantee of profit, but a powerful tool for risk management. The main rule: insure only what can really harm your portfolio.
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