A crypto holder can hedge spot holdings by shorting a perpetual or a future on the same coin: if the price falls, the short gains roughly what the spot loses. Hedges can be full or partial, and cross-asset hedges, such as shorting BTC to protect a basket of altcoins, are simpler but less exact. Hedging reduces risk, and it also caps the upside while it is in place.
Example
You hold 2 ETH, now worth $3,000 each, and expect a volatile week. You short 2 ETH on a perpetual at $3,000. ETH falls to $2,700: the spot holding loses $600 and the short gains $600, minus fees and funding. Had ETH risen to $3,300 instead, the gain on the spot would have been cancelled out in the same way.
Why it matters
Hedging lets you keep a long-term position, for example to avoid realising a taxable gain or to keep earning staking rewards, while removing short-term price risk. It is also the basis of market-neutral strategies such as basis and funding trades.
Common mistake
Opening the hedge on another exchange, or in cross margin, without checking its liquidation price. If price spikes, the short can be liquidated while the spot sits elsewhere, leaving you unhedged at the worst possible moment.
Put it into practice
FAQ
- Can I hedge on the same exchange with hedge mode?
- Yes. Hedge mode lets you hold a long and a short on the same contract at once. Both legs pay fees and funding, so it is rarely cheaper than simply reducing the position.
- Does hedging cost money?
- It costs trading fees and, on perpetuals, funding, which you pay or receive depending on the rate. A hedge with dated futures also locks in the basis.
- Is hedging the same as delta neutral?
- A full hedge makes a position delta neutral, so its value barely changes with small price moves. A partial hedge reduces exposure without removing it.