Hedging strategies involve safeguarding your assets with assets that are negative to each other. By negative, we mean negative in price ranges and value. Whereas, if one asset falls in terms of price, the other rises in price to compensate for your losses. Although, there is no guarantee of protection against the losses one can sustain. But by adopting this diversification strategy, we can minimize our chances of losses.
There are numerous other methods to hedge your crypto assets against volatility. Those hedging techniques and strategies are in the later part of this article. Another hedging technique linked is buying options. By options, we mean specific contracts that have a set expiry time. With the help of options, you can offset specific losses if you observe that your assets are declining in price. Such an option type is a “Put” option. As one invests in a particular crypto asset class and observes that its prices are falling. They can place a put option and sell their assets in a Put contract.
Types of Hedging Strategies
There are basic hedging strategies. Some of them are as follows:
Investing in High-Value Cryptocurrencies
Although the crypto market is highly volatile, Bitcoin and Ethereum are some of the most trusted and reliable cryptocurrencies. When it comes to antifragility and reverting to specific price ranges, Bitcoin is the most promising. Therefore, as a trader, if you want to hedge your crypto portfolio against sudden losses and market reversal. Diversify and keep your assets in valuable crypto classes like Bitcoin and Ethereum.
Allocation of Assets with Diversification
In spot assets acquisitions, certain assets are always in demand. Such assets are all-time favorites among traders and investors. As a trader, the trading strategy involves not just investing all your funds in Bitcoin solely.
Instead of losing all on one asset, there are multiple ways to invest. Some of it is investments in mutual funds, ETFs, and Stocks. Whereas, as a trader or an investor, you can opt for commodity assets such as gold, silver, petroleum, and default. Investment goals can vary from person to person; therefore, it is vital to create investment goals, risk appetite, and preferences.
While keeping your risk affordability levels aside, investing some parts of your funds in forex and different currency pairs is a sane approach. At the same time, you can also keep your portfolio basket filled with government bonds and fixed deposits. Not to invest all you have in assets but some present in the form of cash too.
Going for Derivatives
While hedging for your assets, derivatives are keenly helpful to minimize your risks. But derivatives can act as a two-way sword for your future contracts as most of the derivatives lie in future contracts. These contracts are called futures or derivatives. In crypto, these futures contracts are also referred to as perpetual swaps and future contracts. Unlike traditional finance, futures contracts do not have an expiry date and can be canceled anytime in crypto future pairs trading. Therefore, you can hedge further if you observe a decrease in the price. You can buy short contracts for that currency pair.
Trading with Particular Pairs
It is a common risk management strategy to pair longs with short positions for two specific stocks or cryptocurrencies. However, pinpointing a particular time lapse is crucial. But it identified a period where the underlying asset price is either overvalued or undervalued. And to determine this, we need to spot the RSI of the respective asset class.
Hence, you can implement your strategy by pinpointing a pair and then making long and short trades to break even for losses on any part or pair. Among the other methods, this is also a hedge trading strategy.
Taking Profits through Arbitrage
This strategy works in commodities and the stock market. When a buyer or investor buys an asset or stocks, they can further sell this into another market. It helps to gain leverage over profits generated by a price difference.
An Average Down Approach
When investors or traders buy any share class, they buy more of them in value when the prices increase. Through this approach, they reduce their average costs and hence go for averaging their potential losses.
But ensure you only apply this strategy if you wish to hold your asset long-term.
Is Hedging the Best Trading Strategy?
Since there is no universal strategy to completely stop losses from happening, there are fair chances that applying hedging strategies can minimize losses to an extent. Financial risk tolerance is another step toward meeting financial goals and facing risk tolerance. The investors must bear hedging costs, and we must meet the options and understand the strategy best suits our needs and portfolio.
Pros and Cons of Hedging
Several benefits are linked to hedgings, such as minimizing losses and protecting from inflation and market volatility. Alongside this, it helps you diversify your portfolio. But it does come with some cones, such as not being 100% risk-free and helping to reduce losses. However, as hedging costs also exist, one cannot expect to earn substantial losses from it.
Remember that your hedging strategy can turn against you and is only applicable when constant analysis and market monitoring exist. However, as an investor, the most suitable markets to apply hedging are commodities and foreign currency markets, where we see more fluctuations in the price of an asset. Multiple securities are associated with hedging strategies. Many traders prefer to invest in shares, ETFs, and stocks and use hedging strategies.
In the crypto sphere, volatile market conditions make the future and options more suitable to investors. They work as a shield against market and price volatility.
Conclusion
An excellent method to lower market risk is to hedge. You must select an appropriate approach and have an in-depth understanding of the market you are investing in to implement hedging properly. Investing in safe-haven assets like gold, silver, and oil, which maintain their value and can balance the losses of any of your more volatile investments, is one of the more uncomplicated hedging techniques.
