

How to operate hedging in the currency circle? How to reduce investment risks? Hedging strategy teaching
Jul 10, 2025 pm 09:51 PMThe currency market is known for its high volatility, and the rapid rise or fall of asset prices is the norm. Although this feature brings potential high-yield opportunities, it also comes with huge risks. Hedging, as a risk management tool, plays an important role in cryptocurrency investment, aims to reduce risk exposure to the overall portfolio by establishing complementary positions rather than pursuing huge returns in a single direction.
The core concept of hedging is to offset or mitigate the adverse effects of this risk by establishing a position in the opposite direction while taking a certain risk. This allows investors to protect the value of their portfolios when the market fluctuates violently.
What is hedging in the currency circle?
1. The essence of hedging is a risk neutralization strategy. Investors hold an asset (such as Bitcoin spot) and worry about the losses caused by the decline in its price, they somehow establish a profit position related to the decline in Bitcoin price, thereby offsetting the loss of spot depreciation.
2. Hedging in the currency circle usually involves the combination of the spot market and the derivatives market, or operates using price differences between different currencies and different exchanges.
3. The goal of hedging is not to maximize returns, but to smooth the return curve and reduce the volatility of the net value of the investment portfolio. A successful hedging operation can allow investors to lose less or even less when the market falls, and when the market rises, the losses in hedging positions will partially offset the profits of spot.
Common currency hedging strategies
1. Futures and Spot Hedging (hold spot short futures/perpetual contract): Investors buy spot of a certain cryptocurrency and sell the same value of the cryptocurrency contract in the futures or perpetual contract market . If the spot price falls, the profit of short contracts makes up for the spot losses; if the spot price rises, the loss of short contracts offsets the profits. In this way, the total value of the portfolio is roughly locked at a relatively stable level.
2. Basis arbitrage: This strategy uses the difference (basis) between the price of futures (or perpetual contract) and the spot price. When the futures price is significantly higher than the spot price (positive basis), buy spot and sell futures; when the futures price is significantly lower than the spot price (negative basis), sell (or short) spot and buy futures. Close the position on the delivery day or when the basis converges, and earn profits from the basis convergence .
3. Cross-exchange arbitrage: Use the short-term price difference between different exchanges in the same currency. Buy on lower-priced exchanges and sell on higher-priced exchanges to quickly close the transaction to capture the spread . This strategy requires extremely high execution speed and is limited by the transfer efficiency and expenses of funds between different exchanges.
4. Use options hedging: Purchasing put options can provide downward protection for the spot held. Just like investing in insurance, if the currency price falls below a certain level, the returns of put options can make up for the spot loss.
Considerations for hedging operations
1. Transaction cost: Hedging usually involves at least two transactions in opposite directions, which will incur double or even multiple transaction fees. The rate of capital in the derivatives market (especially perpetual contracts) can also be a constant cost, especially when the market is one-sided.
2. Liquidity: When conducting hedging operations, the liquidity of the relevant market or trading pairs needs to be considered. If the market depth is insufficient, large orders may not be traded at the expected price, or they may face a large slippage when closing positions, affecting the hedging effect and even causing additional losses.
3. Operational complexity: Different hedging strategies have different operational requirements and risk points. Understanding the rules, forced leveling mechanisms, basis changes, capital rate calculations, etc. of derivative contracts is crucial to successfully performing hedging. Complex strategies require more professional knowledge and experience.
4. Fundamental risk and imperfect hedging: Futures and spot hedging depends on changes in basis, and the basis may develop in a direction that is not conducive to hedging. Cross-currency hedging depends on the correlation between different currencies, and the correlation may decrease with changes in the market environment. Perfect hedging is hardly there, and there will always be exposures that cannot be completely offset.
5. Funding efficiency: Hedging operations usually require locking a certain amount of funds as margin or other purposes, which may reduce the overall efficiency of funds. Compared with direct holding of spot, the rate of return on capital may be reduced.
The above is the detailed content of How to operate hedging in the currency circle? How to reduce investment risks? Hedging strategy teaching. For more information, please follow other related articles on the PHP Chinese website!

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