Hedging (in English, Hedging) is a risk management strategy in which an investor or trader opens an additional position that offsets possible losses on the main asset. The classic mechanism is that a market participant who owns an asset or plans to buy it simultaneously enters into an offsetting trade with derivative instruments — futures, options, or contracts for difference. If the price moves in an unfavorable direction, the loss on one position is partly or fully covered by the profit on the other.
In the crypto environment, hedging is especially in demand because of high volatility. For example, a coin holder who fears a drop in its price can open a short position on a futures contract for the same asset. When the price falls, losses on the spot portfolio are offset by income from the short, and when it rises — the other way around, which is what provides the balance.
Main hedging instruments
- Futures contracts — they lock in the terms of a future trade.
- Options — they grant the right, but not the obligation, to make a trade at a pre-agreed price.
- Stablecoins — moving part of the funds into assets with a stable value.
It is important to understand that hedging reduces risk but also limits potential profit, and it is associated with additional costs — fees and the cost of the derivative instruments themselves.
