How to Use Crypto Futures Trading to Hedge Your Crypto Portfolio
Whilst the majority of crypto markets have been down in the past year, in recent weeks, numerous cryptocurrencies actually achieved new highs, allowing trading volumes to remain high since the beginning of the year. While some experts believe that this trend may persist for several more months, it’s impossible to predict the future direction of the market.
The “HODL” mindset, which encourages holding onto investments indefinitely without ever selling, may not be the best approach for everyone. The crypto derivatives have made it possible for anyone to hedge their crypto portfolio to mitigate certain portfolio risk.
What is Hedging?
Hedging is a method of placing strategic trade designed to mitigate the risk of unfavorable price movements in another asset. This is typically achieved by taking a counterbalancing position in a related asset or derivative asset that is based on the asset being hedged.
Crypto Derivatives are particularly effective as they hedge against their underlying assets due to their well-defined relationship. These assets move in correlation to one or more underlying assets and include options, swaps, futures, and forward contracts.
Hedging Trading Strategies
Here are a few cryptocurrency hedging strategies that traders can use to mitigate risks on LBank exchange
Futures Trading
Futures trading is a popular method of hedging in the cryptocurrency market, allowing traders to leave their position open for a specified period and maximize their profits. LBank provides a platform for traders to trade futures contracts with various expiration dates.
With futures contracts, investors can mitigate the risk of falling prices by taking a short position or benefit from increasing prices by taking a long position. This is a valuable tool for traders seeking to hedge their exposure to the volatile crypto market for a reasonable period. Trading futures on LBank can help maximize profits and mitigate risk in the volatile crypto market. With futures, you can take short or long positions to benefit from falling or increasing prices, speculate on market direction, and stabilize price fluctuations. Leverage risks are a consideration, but futures remain a popular option for hedging in crypto.
Shorting
Shorting is common in the stock market and can also be applied to the crypto market. On some exchanges, traders can short a coin with margin by borrowing cryptocurrency, selling it to another trader, and then repurchasing it at a lower price. The difference between the sale price and the repurchase price is the profit for the short seller.
It’s important to note that borrowing assets for short selling involves paying interest. However, by lending out assets for longer-term holdings, investors can earn interest on their holdings.
Shorting Bitcoin can help mitigate losses on longer-term holdings. For example, if BTC experiences a $5000 drop, hedging by shorting it in a separate transaction can yield a profit close to that amount. This is a form of risk management, where gains from short selling offset losses in the core holding. Many longer-term traders use this type of hedging strategy at one point sooner or later.
Perpetual Swaps
Perpetual swaps are a popular form of derivative trading that allows you to buy or sell an underlying asset’s value without setting an expiration date for the position. This gives you the flexibility to enter or exit a position at any time, making perpetual swaps an attractive option for traders seeking more buying power and greater exposure to price fluctuations.
Operating under a funding rate mechanism, perpetual swaps charge a fee or rebate to continue holding your position. Before using perpetual swaps as a hedging strategy, it’s crucial to understand the funding rate mechanism and potential returns, as well as the leverage allowed by the exchange (which can be as high as 100x in some cases).
Perpetual swaps have gained notoriety in the crypto market because they enable traders to leverage positions without an expiration date. Unlike traditional futures contracts, perpetual swaps are traded close to the index price of the underlying asset. Additionally, funding rates incentivize traders to buy perpetual swaps when the index price is bullish, ensuring price stability.
Perpetual contracts have quickly taken off on platforms like LBank because they don’t rely on an expiration date, giving traders more flexibility and control over their positions. You can consider using perpetual swaps as part of your trading strategy, but ensure to understand the funding rate mechanism, potential returns, and leverage offered by the LBank exchange.
Wrapping Up
To effectively manage risk, it is crucial to establish a plan for identifying, analyzing, monitoring, and controlling potential risks. Tailored strategies, such as setting stop losses and taking profits, can be developed to address different types of risks. Staying up-to-date with market fundamentals and external factors that may impact prices is also essential. Regularly monitoring progress and making adjustments as necessary should be incorporated into risk management plans.
Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.
