Table of Contents
Whether as accredited investors or as retail participants, most of us tend to only look at the potential upside when purchasing stocks and cryptocurrencies. As long as everything is going smoothly and the price goes up, then we all get a little bit richer, at least on paper. However, as long as those profits are unrealized, our assets will be left to the whim of the market. When the pullbacks come, which tend to happen much more frequently in the crypto space, most if not all of your gains could be easily wiped out, and then some.
But what if you could reduce your losses or even protect the gains that you’ve made so far? Well, there are multiple ways to do that, but collectively they are all known as hedging. Hedging is an incredibly useful method for mitigating the risk of unfavorable price movements, either by capping your profits or your losses. In other words, your potential gains may be reduced via hedging, but you could also limit your downside if things go south.
Hedging can be achieved in a variety of ways, notably by investing in instruments or assets that are correlated to your current holdings but in the opposing position. This can be achieved through diversification, options, futures, and perpetual contracts. In this article, we will be taking a closer look at these different strategies and their subtle differences. Also, we will see how these instruments have evolved into more than just an insurance policy but also a tool for generating yield, regardless of how the market moves.