Specific strategies and practical methods for hedging in virtual currency

Basic Classification and Concepts of Hedging

1. Hedging generally refers to “full hedging,” but in practice, “partial hedging” is also utilized.

   ① Full Hedging: If you hold X BTC in spot, you will establish a short futures position of the same amount of XBTC. This is mainly applied at the end of a large market cycle.

   ② Partial Hedging: Essentially, this is a trade that takes advantage of short-term price differences. Once you understand the concept of full hedging, the idea of partial hedging can be easily grasped.

Example of Full Hedging

2. Specific examples of full Hedging application:

   ① Suppose you hold 100 BTC in spot and have determined through market analysis that the uptrend at the daily level is continuing. However, if the downtrend at the 4-hour level has not yet ended, or there is a risk of continued decline, what should you do? In such a situation, you can utilize a hedging strategy to avoid the downside risk at the 4-hour level.

   ② Following the principle of “considering the possibility of defeat before being confident of victory”, if BTC falls below a certain price, the anticipated upward scenario may become invalid. In other words, there is a risk that the market may shift to a downward trend at the daily level. To prevent a significant reduction in profits, set up an equivalent short position in BTC futures in advance— for example, with 10 BTC at 10x leverage (or 20 BTC at 5x leverage, or 5 BTC at 20x leverage, etc., ensuring that the short position is of equal value). By using a cross-margin setting, the liquidation risk is nearly eliminated.

   ③ What will happen if the market price falls by 10%?

   Since there is a short position equivalent to 100 BTC in the futures market, a 10% drop in price results in a profit of 10 BTC from the futures position. On the other hand, the 100 BTC in spot holdings incurs a loss of 10 BTC due to the 10% drop in price. Overall, the total value of the account assets remains unchanged. In this way, hedging using futures allows for the preservation of asset value (not affected by the 10% price drop). This is the essence of hedging (risk avoidance).

   ④ Conversely, what happens if the market price rises by 10%?

   A short position worth 100 BTC in the futures market will result in a loss of 10 BTC if the price rises by 10%. However, at the same time, the 100 BTC in spot holdings will generate a profit of 10 BTC due to the price increase. As a result, the total value of the account assets remains unchanged.

   ⑤ The key to full Hedging is: Directionality of opposition (spot + futures short selling) and Equivalence of amounts (short selling position equal to the amount of the held spot).

Application of Hedging Strategies and Their Application to the Market

Hedging strategies that respond to the high volatility of the cryptocurrency market are particularly effective during market turning points or periods of heightened uncertainty. By utilizing futures contracts, investors can adjust their portfolio's risk exposure while protecting their assets from significant market fluctuations.

In professional risk management, the appropriate setting of the hedging ratio and margin management considering capital efficiency are also important factors. By flexibly adjusting the hedging ratio according to market conditions, more effective asset protection becomes possible.