Hedging Bitcoin, or any cryptocurrency, involves strategically opening trades so that a gain or loss in one position is offset by changes to the value of the other position. Generally speaking, if you’re concerned about the risk to your position, it is probably safer to reduce your position size or close your position completely. However, hedging is seen as a useful strategy for traders who want to maintain their original Bitcoin holding but create a neutral exposure. There are a variety of ways to achieve a cryptocurrency hedge, but two most popular methods are:
1. Short-selling Bitcoin
Short-selling is a common hedge against a long exposure, whether this is a Bitcoin holding or a speculative trade. If you already own Bitcoin, but believe it is due to fall in the short term, you might decide to reduce your exposure by opening a short position (taking a position to sell) on the cryptocurrency. At the same time. This way, if the market falls, you can cover some of the losses to your initial position with gains on your short position.
Picture 1. How to short sell on BitMar Spot
The traditional method of short-selling would involve borrowing Bitcoin from a broker or third party, selling it on the open market, and then returning the coins to their owner. It's hard to find third parties that are willing to lend you the asset. Even if you do find a willing lender, they are able to recall their asset at any time – this could mean you would have to buy the coins back for a much higher market price. Most short-selling of Bitcoin is performed using our other hedging methods: Bitcoin futures.
2. Hedging Bitcoin with futures
Bitcoin futures were first introduced in 2017, by the Chicago Board of Options Exchange (CBOE) and later by the Chicago Mercantile Exchange (CME). Futures are a type of financial contract in which two parties agree to trade an asset, in this case, Bitcoin, at a predefined price on a specific date in the future. Bitcoin futures are seen as providing a legitimate way for market participants to lock in a market price.
Let’s say you own 1 Bitcoin, which is currently worth $8,000. By opening a short position of 1,0000 futures contracts (each with a contract size of 0.0001 BTC), you are essentially ensuring that you will hold your Bitcoin asset for a value of $8,000 in the future regardless of what happens in the underlying spot market.
The actual operation is: If the market did fall, let’s say down to $6000, your futures position would be $2000 in profit, this will a perfect hedge of your loss on the Bitcoin value. If the price of Bitcoin on the spot market increased instead, up to $10,000, you would be obliged to pay the loss on the futures market with the profit you earned on the Bitcoin value increase.
Always remember, in this case, the Bitcoin futures is a hedging instrument, not a speculating tool.
Picture 2. Hedging Bitcoin with BitMart Futures
3 reasons why BitMart Futures is the good hedging venue for traders
On BitMart Futures, traders enjoy one of the lowest taker fees in the industry. The baseline fee structure charged by BitMart Futures please check here.
In terms of market liquidity, BitMart Futures has quickly narrowed the gap with Bitmex. The narrowing spread indicates increasing liquidity on BitMart Futures' perpetual markets. Thus, traders can transact orders efficiently with little to no impact on prices.
BitMart Futures allows traders to switch between the spot and futures markets easily and quickly. As such, it is easier for traders to conduct sophisticated trading strategies such as risk hedging and arbitrage. In periods of high volatility, these traders will move from spot to futures to capitalize on market movements. Thus, users can trade with optimal efficiency in both markets due to the deep liquidity and ease of moving capital between spot and futures.
ATTENTION: Cryptocurrency investment is subject to high market risk. Please make your investments cautiously. This is not investment advice, an endorsement by BitMart as to the intrinsic value of a digital asset, or a commitment by BitMart team to support any speciﬁc asset/token that the announcement pertains to.
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