If you are investing or trading, you surely know that the market is unpredictable. Today an asset may rise, and tomorrow it may sharply fall due to news or changes in the economy. To minimize losses in such situations, there is hedging — it is a kind of "insurance" for your investments.
Hedging is a strategy that helps protect your money from sharp market changes. The method is based on the principle of compensation: you open additional positions that help reduce losses if the market goes against you.
In simpler terms, it's like buying insurance for your property. For example, you insure your house against fire. If nothing happens, the insurance is not needed. But if a fire occurs, you receive compensation. Hedging works the same way, only instead of a house — it's your investments.
How to hedge risks?
One of the popular ways to hedge is through futures. These are contracts where you fix the purchase or sale price of an asset in the future in advance.
Let me give you an example👇
Imagine you have 1 BTC, which is currently worth $93,759 (the price is current as of the time of writing the article).
You are afraid that its price will drop. To protect yourself, you sell a futures contract on BTC at the same price — $93,759. If the price does indeed drop to $88,759, then:
In the main market, you lose $5,000 (BTC decreased in value).
But on futures, you earn $5,000 (you sold it for more than it became worth).
In the end, you compensated for your losses, even if the market went down.
Main hedging strategies
🔖Using futures:
It is one of the most accessible tools. You fix the price of the asset and reduce the impact of market fluctuations.
🔖Diversification:
Do not invest all your money in one asset. If one asset falls, others can compensate for the losses.
🔖 When is hedging needed?
Hedging should be used if:
❗️ You expect sharp market movements, but you are not sure which way.
❗️You want to preserve your money, not just earn.
❗️ You have large investments that you cannot afford to lose.
Pros and cons of hedging
Pros:
✔️Protection of capital from large losses.
✔️Reduction of the impact of sharp price jumps.
✔️Opportunity to preserve profit.
Cons:
✔️Hedging costs money (commissions for futures).
✔️Limiting profits: if the market goes your way, you earn less because part of the positions is "protected".
✔️ Requires knowledge and experience, otherwise, you may lose more than you protect.
💡🔖If you are a beginner, start with diversification: invest money in different assets to reduce risks. If you want to try futures, first study them, test on demo accounts, and start with small amounts.
And most importantly — remember: hedging helps protect capital, but it does not eliminate risks completely. It is just a tool that makes your portfolio more resilient to market fluctuations.
In my opinion, it's better to spend a little on protection than to lose everything.
We'll discuss diversification in another article🤗
