Hedging
Also called: hedge · hedging strategy
Definition
Hedging is opening a position that offsets the risk of another position, so that a loss on one is partly or fully balanced by a gain on the other.
This entry is shown in English.
How Hedging works
The classic crypto hedge is holding a coin and shorting the same coin with futures. If the price falls, the spot holding loses value and the short gains. You keep ownership of your coins, for example for staking, tax timing or long-term plans, while reducing exposure to a drop.
A hedge can be full or partial. Shorting the same amount you hold makes you roughly market-neutral; shorting half cuts your exposure in half. Options are another tool: buying a put option limits losses below a set price in exchange for paying a premium up front.
Hedging is not free. Futures hedges have fees and funding, which can be a cost or an income. Options cost a premium. A hedge also caps your upside, and an imperfect hedge, such as shorting BTC to protect a small altcoin, can fail when the two do not move together. Margin on the hedge must be managed too, or it can be liquidated during a rally while your spot gains.
Example
Suppose you hold 10 ETH at 3,000 USDT, worth 30,000 USDT. You short 10 ETH on a perpetual at 3,000 using 3,000 USDT of margin. ETH falls to 2,400: your spot loses 6,000 USDT and the short gains 6,000 USDT, so your total stays near 30,000 before fees and funding. If ETH rises to 3,600 instead, spot gains 6,000 and the short loses 6,000, so you miss the upside.
Common mistakes
- Hedging with high leverage so the short gets liquidated in a rally while the spot gains are not available as margin.
- Forgetting funding costs on a long-running perpetual hedge.
- Hedging an altcoin with a BTC short and assuming the two will always move together.
Learn and practise
FAQ
How do you hedge crypto holdings?
The most common ways are shorting the same coin with futures or buying put options. Each reduces downside but has costs and caps or changes your upside.
Is hedging the same as closing the position?
The economic exposure is similar, but you keep the coins. That can matter for staking, tax timing or simply wanting to keep the asset.