How does crypto futures trading work as a hedging strategy?
Traders are well aware that cryptocurrency trading can be a high-risk venture. Market corrections are unavoidable. As a trader, you must discover measures to safeguard your investments from risk, and crypto hedging strategies can help. Hedging entails taking positions in opposite market directions in order to mitigate the risks and consequences of market movements.
A hedge is an investment made to lessen the risk of an asset's price moving in the wrong direction. Hedging strategies enable traders and financial institutions to place many simultaneous bets in opposite directions to reduce the chance of large losses.
Hedging has been a financial market strategy for traders as a risk management approach for very long. It enables you to keep the value of your investments consistent rather than focusing on high profits in unfavourable market conditions.
Risks of crypto trading
Because cryptocurrencies are so volatile and unexpected, unforeseen price changes are common with shifts in market sentiment. The value of cryptocurrencies frequently fluctuates by thousands of dollars at a time.
The entire concept of cryptocurrencies revolves around not being regulated and decentralized, which has some drawbacks of its own. While governments and financial organisations are beginning to notice, questions remain over whether they should be classified as a commodity or a virtual currency. Because there are few restrictions to safeguard sellers and buyers, investors must rely on developments, individuals, and personal experience to make investment selections.
Traders usually benefit from a high degree of leverage by using low margin deposits and collateral, but using extreme leverage can raise losses in bad market situations.
So, to minimize these risks, traders employ various methods including futures trading. Let’s take a look at what futures trading is and how it can be an effective hedging strategy.
Futures Trading as a Hedging Strategy
A futures contract is an agreement to buy or sell an asset at an agreed-upon price at a specified time in the future and is bound by law. This trade happens regardless of the prevailing market price at the contract's termination date. Corporations and individuals both employ futures contracts, aka futures, as a hedging tool. Hedging is a term that refers to a variety of financial methods that are designed to reduce the risk that investors and organizations face.
Some commodity businesses and consumers employ futures contracts to mitigate the risk that an unfavorable price movement in the underlying asset will force the company to incur unanticipated expenses or losses in the future.
When an investor utilizes futures contracts as part of a hedging strategy, the purpose is to limit the risk of losing money due to a drop in the market value of the underlying asset, which is usually securities or similar financial instrument. Investors typically purchase a futures contract if the investment or financial instrument is known for its high volatility.
The futures contract can be traded before the agreed-upon date because it has its own secondary market. which results in investors and businesses having more liquidity. Futures contracts are a variant of derivative trading that includes Contracts for Difference (CFDs), Options, and Perpetual Swaps, among others.
Because cryptocurrencies are so volatile, most traders buy when the prices are low and sell when the prices are high. Such selling and buying, on the other hand, can cause investors to miss out on possible rewards. Cryptocurrency futures allow you to keep your position open, allowing you to maximize the For example, if the current market price for Bitcoin is $33,000 per coin and the futures price is $35,000, Company X may commit to a legal contract requiring them to sell $20,000 of BTC six months from now. Company X will be able to sell its $20,000 worth of BTC at $35,000 when its futures position expires in six months.
Company X would have been obliged to sell every coin at $30,000 if it hadn't decided to take this stake in and BTC had unexpectedly dropped to $30,000. In this case, the company's risk of financial harm as a result of a sharp drop in the price for BTC in the future has been reduced. Company X has promised that for every BTC sold, it will receive $35,000.
The major benefit of a futures contract for investors is that it eliminates uncertainty about the future price of a commodity, investment, or financial instrument. Companies can avoid the risk of unanticipated spending or losses by locking in a price for which they are guaranteed to be able to acquire or sell a certain asset. For more information and to get started with futures trading, visit C-Trade, one of the largest Crypto derivatives exchanges in the world!
Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. C-Trade, its affiliates, agents, directors, officers, or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.