The volatility of the crypto market has always held the key to the chest of possibilities for traders to reap significant profits quickly. Naturally, this same volatile nature of the crypto space comes with equally considerable risks. An example is Dogecoin, whose price skyrocketed exponentially by over 800% within 24 hours in 2021 before plummeting sharply. Nonetheless, the opportunities offered by the world of crypto can be tempting, and you may wonder how these risks can be mitigated so you can have greater peace of mind when dipping your toes into crypto trading. This is where hedging strategies will be helpful. Hedging involves using financial instruments to counter losses or limit the risks of your investment, enabling you to have fun with crypto trading while doing so more safely. To help you understand the tools you can leverage on when you trade, this article provides an overview of the common ways to hedge effectively.
1. Portfolio Diversification
One of the simplest, fool-proof ways is to diversify your crypto portfolio. In other words, rather than investing all funds into one crypto, you spread out your risks by purchasing different digital assets. In doing so, a drop in the price of a particular crypto you own will be balanced out by gains in other assets, minimizing your overall loss compared to when you invest fully in one crypto. Apart from trading various cryptos, effective portfolio diversification is contingent on making strategic investments in assets that do not move in a uniform direction, such as those that are unrelated or non-correlated. However, as many top cryptos have a strong correlation with Bitcoin, identifying the right mix of assets to create a truly diversified portfolio can take time and effort.
2. Short-selling Assets
Another common hedging strategy is short selling. Short selling involves selling your digital asset at a high price with the belief that the crypto’s value will subsequently fall so that you can buy it back at a lower price. If your prediction is correct, profits from trading will cover some of the losses from your initial position and reduce your exposure. For speculative traders, short selling also enables them to gain from repurchasing the crypto at a lower price in future and profit from the difference. However, as the price of an asset can theoretically reach infinity, short selling can be risky, and losses due to a wrong guess can potentially be unlimited. Therefore, this tactic may be better suited for experienced investors. It also always pays to be extra careful and thoroughly assess the market before short selling.
3. Trading Crypto Futures
In the world of cryptocurrency, futures are a form of derivative contract that obligates a trader to exchange a crypto asset at a stipulated price on a specified date. By locking in a price for your asset, crypto futures protects you from suffering huge losses or incurring extra expenses due to price fluctuations. As futures have a secondary market of their own where trading can take place even before the contract matures, investing in futures comes with the additional benefit of keeping your position open, allowing you to maximize the gains from your investment.
Enjoy Greater Ease Trading Crypto with BIT
Considering the volatility of the crypto market, the importance of employing hedging strategies can never be understated. With each type of strategy addressing a different concern, the best practice is to evaluate the risks you face and to employ a mix of measures to ensure that the protection you get is sufficiently comprehensive. That being said, hedging does not remove the risks of crypto trading entirely and this is where BIT can play an integral role in filling the gap. As a trading platform sporting a Unified Margin system, BIT affords the flexibility of offsetting profits and losses for multiple positions against each other, weaving an extra layer of safety net that augments your hedging strategies. This protection is just one of the many benefits of the system. Under the unified margin model, you will also be empowered to make the most out of your available capital, unlocking more opportunities to amplify your returns. Enjoy greater assurance when trading crypto and multiply your profits today on BIT or browse through our resources to learn more about our platform today.
This article should not be taken as financial or investment advice. Making an investment or financial decision is a choice. Do your research!
BIT is a full-featured cryptocurrency exchange that is designed for use by professionals. It provides services such as the execution of trading strategies, price discovery, and liquidity provision. BIT is always working to encourage the creation of innovative new financial products, improve the trading tools available to users, and offer a wide variety of tokens. Trade with confidence knowing that the platform is built with institutional-grade security and risk management measures in place. Sign up for BIT and switch on your future. Sign up on BIT, and switch on your future.