Futures Hedge Mode Crypto Trading: The Best Way To Manage Risk In Crypto Trading

Futures Hedge mode crypto trading, Hedge trading is a strategy that provides protection against downside risks to your profits.

Binance introduced hedge trading options to its users. Now, traders can secure their profits without closing out their positions.

You can also use the new hedging features on Bitmex, Bybit, and FTX now. Hedging is an important risk management tool that both experienced traders and beginners will find useful in their trades.

If you are a futures trader and want to know about hedge mode in futures trading, then read this post to learn more about how hedge mode works in futures trading.

What Is Hedging?

Hedging is a risk management strategy that traders use to protect themselves against losses. The act of hedging refers to taking a position opposite the current open position in a particular asset.

Traders treat it as an insurance policy that shields them against negative events that impact their investments. Keep in mind that hedging does not prevent negative events from happening. Instead, it is a strategy that reduces the financial ramifications.

Many traders look at the volatility of the crypto market as an opportunity to make money. However, that also increases the risk of experiencing huge losses.

One of the reasons cryptocurrencies were created is decentralization. For this reason, crypto traders can profit from a lack of regulation.

Unfortunately, this lack is also problematic because it leaves the market without protection, which increases the likelihood of larger losses. In order to protect themselves, crypto traders must rely on their experience and individual judgment when trading cryptocurrency- which is a risky business.

Use Hedging To Minimize Trading Risks

One way that traders minimize risks in cryptocurrency trading is by hedging. If your trader owns a profitable position in Bitcoin, but they predict and believe the price will go down, they can hedge their position to protect themselves.

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In order to avoid losing the profit they’ve already made, traders will often take on a second position opposite their current profitable one in order to protect their unrealized profits. As the market changes directions, their initial profitable position might turn into a loss. But that loss will be offset by the new position they took while hedging. This is commonly done by short-selling or trading futures.

How To Hedge With Future Trading?

There are various cryptocurrency hedging strategies that traders can use to reduce risk. The three most common methods are diversifying your portfolio, short-selling, and using derivatives like futures contracts.

The result is that hedging is not an isolated investment strategy in and of itself, but rather the utilization of other risk management strategies in order to contract a downturn in a particular market.

Example

Suppose you bought bitcoin for $18,000, and it has risen to $19,000. You want to profit from this, but don’t want to close your position yet because you’re expecting the price to go up even more. This is where hedging comes in, and you can use it to secure your profits without having to close your order.

In order to protect yourself, you may want to consider opening a short position at that price. This way, if the price falls below $19,000, your profits from the long position will be secured. Be sure to calculate the cost of your trades (including trading and funding fees) when making decisions like this.

Hedge mode is currently available only on the new Binance Futures website version. On mobile apps, you can also use the new hedging features on Bitmex, Bybit, and FTX now. To enable hedge mode, make sure that you visit your preferences and then check “Enable Hedge Mode” under Adjust Position.

Portfolio Diversification

It’s a smart idea to invest in more than one cryptocurrency. This is called diversification and refers to buying different coins instead of investing everything in one coin. Diversification lessens the risk of losing money on investment since it’s not put all in one place.

With a diverse portfolio, the risk of investing in a single cryptocurrency is minimized because it acts as a hedge against other cryptocurrencies.

So, when the price of one token falls, you don’t lose everything since some of your investment is still in other tokens.

A diversified strategy generally and preferably involves putting funds into investments that don’t move in a uniform direction. The most optimal scenario is that a trader invests in different assets that are unrelated or have low correlation. However, the cryptocurrency market is different from the traditional stock market, which hosts multiple asset classes and contains a diverse set of industries. Cryptocurrencies tend to move similarly and may be difficult to achieve fully-diversified portfolios.

Remember to diversify your portfolio. However, it’s important to do your own research on which cryptocurrencies you include. Generally, a portfolio should have a good mix of different coins, like Bitcoin (BTC) and Ethereum (ETH), to balance the risk associated with altcoins.

If you’re interested in diversifying outside cryptocurrency, that’s absolutely an option. Bitcoin has been viewed as a non-correlated asset with many others and has a low correlation to stocks (the S&P 500 index) as well as tech stocks (represented by the Nasdaq-100). So, if you’d like to diversify away from bitcoin, these would be viable options.

Futures to Hedge Crypto

Traders can also use contracts called derivatives for hedging cryptocurrency. A derivative is a financial contract whose value derives from an underlying asset. Futures are the most common derivatives traders use to hedge cryptocurrencies because they establish a price for an asset at a later date. A cryptocurrency future helps traders hedge against falling prices by taking a short future position and profiting if the price increases by taking a long future position.

Short-Selling

As the cryptocurrency market becomes more volatile, traders are looking for ways to hedge their positions. Short-selling refers to trading when you believe the price of a certain asset will decrease in the near future, and then repurchasing it at a lower price in order to profit from the difference.

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Short-selling is a strategy that starts with traders analyzing the price chart. For example, divergence analysis can help someone determine whether a cryptocurrency’s price could reverse soon. Once indicators show that a trend is reversing downwards, traders borrow a set number of crypto tokens and sell them on the market.

When the price of a cryptocurrency falls, traders can repurchase the same number of tokens at a lower price and return them to the exchange or broker. However, if the price increases, traders would have to buy back the same number of tokens at a higher price and lose money.

Final Words

Hedging strategies can be useful for mitigating risks in volatile markets, such as the cryptocurrency market. However, it is important to take note of transaction fees and the risks associated with using leverage when applying hedging strategies. With that being said, diversifying your portfolio, short-selling, and trading derivatives are all popular cryptocurrency hedging strategies that might be worth considering. Hedging is a risk management strategy that can be used by traders to mitigate risks. However, there is no guarantee that hedging will always be effective, and it can sometimes even be counterproductive. Therefore, traders should understand the available hedging tools and practice using them before employing them in their trading.

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About The Author

My fascination with cryptocurrency and blockchain technology began in 2013. I also have an entrepreneurial spirit that has led to the creation of CryptoGuideToday, a blog that covers everything related to Blockchain and cryptocurrencies. I am passionate about educating people about cryptocurrencies and providing insight on blockchain technology. I am a strong believer in self-education being the key to success.

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