How To Hedge Your Cryptocurrency Investment

Before we discuss how to hedge your cryptocurrency investment, we will describe what hedging means. Generally speaking, a hedge is referred to as an agreement or transaction that reduces the risk of an investment. To better explain let's say you buy a particular cryptocurrency like Bitcoin, you would expect the value of the token to rise in the future, but to be on the safe side to ensure that you do not end up losing your entire funds to price volatility, you will have to enter an agreement or transaction with someone to purchase this token at a specified price and at a specific time. Prior to this time, cryptocurrency traders, in general, have been faced with the problem of price volatility which means that the price of crypto tokens would rise and fall unexpectedly. Hedging was developed to reduce the risk by ensuring that investors reduce their risk by entering into an agreement with individuals.

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The importance of hedging for all crypto traders cannot be overemphasized, it has been described as the direct opposite of speculation as these crypto holders are not trying to win but to ensure that they do not lose their entire savings if the value of a particular crypto drop. Hedging ensures that investors get a stable and constant cash flow, it helps investors to determine the purchase and buying price of various cryptocurrencies and securities as well. Also, it also reduces the transaction cost and the risk exposure of investors.

To hedge cryptocurrencies, certain derivatives must be used. Some of these derivatives include the future contracts and the option derivative.

The Future Contract is a hedging derivative which ensures that the risk of investing in financial instruments and cryptocurrencies is reduced. To explain how this derivative works, we will use an example. Let's say Phil bought about 10 BTC tokens worth at least $90,000, with the hope that the value of this crypto will rise in the future, but because of the price volatility of cryptocurrencies, he decides to enter a future contract. Richard who happens to be of the opinion that the value of the crypto will rise in the future would enter into an agreement with Phil. The contract will specify that Phil would buy the token for a slightly discounted price and at a particular price. This is exactly how the future contract derivative works.

The Options derivative have been likened to the Future Contracts because they both involve future transactions. As the name implies, it offers investors two options, the call and buy option. The Call Option allows the investor to buy a cryptocurrency if he so desires to, the Buy Option, on the other hand, allows him to sell. Like the future contracts, the crypto holder will have to enter into an agreement with another individual who will buy the crypto as a specific amount and at a particular period of time. It allows the investors to choose whether to sell the crypto if the value increases or still hold it.