Hedging

A hedge works like insurance: it is a second position that tends to gain when the main one loses. A bitcoin holder worried about a drop can short bitcoin futures of a similar size, so a fall in price produces a loss on the coins and a matching gain on the futures. Overall exposure shrinks, partly or fully, depending on the size of the hedge.

In crypto the usual tools are perpetual futures, dated futures on venues such as the CME, put options and simply moving part of a portfolio into stablecoins. Some yield products use delta-neutral strategies, holding an asset alongside an equal short position to collect funding payments while staying neutral to price.

Hedging is never free. Futures carry funding costs or basis, options cost a premium, and a hedge removes gains as well as losses. Imperfect hedges, such as protecting an altcoin with bitcoin futures, can fail when correlations break, and leveraged short positions used as hedges can still be liquidated.