Hedge Your Crypto Portfolios with Perpetual Futures
In the volatile cryptocurrency market, hedging is a useful risk management strategy that every trader needs to know about, and using perpetual futures is a way to protect your portfolio from unexpected price swings.
Perpetual futures, also known as perpetual swaps, are derivatives that combine aspects of traditional futures with the flexibility of spot trading. Unlike standard futures contracts that have a set expiration date, perpetual futures allow traders to hold positions indefinitely, opening up a range of possibilities for hedging and speculation.
Let’s explore how you can use them in your trading strategy.
How to Hedge with Perpetual Futures
Imagine you hold 1 Bitcoin (BTC) in your spot wallet and believe in its long-term potential. However, you're concerned about a possible short-term price dip due to upcoming market uncertainty. You decide to hedge your BTC position using perpetual futures on Flipster.
Access Flipster's Perpetual Futures Market: Log in to your Flipster account and navigate to the perpetual futures trading section.
Select the BTC Perpetual Futures Contract: Choose the BTC/USD perpetual futures contract.
Determine Your Hedge Ratio: Decide what portion of your BTC holdings you want to hedge. For this example, let's say you want to fully hedge your 1 BTC.
Open a Short Position: Since you're concerned about a price drop, you'll open a short position in the BTC perpetual futures contract. Enter "1" as the quantity (representing 1 BTC).
Set Your Leverage (Optional): Flipster offers leverage on perpetual futures. If you choose to use leverage, remember that it amplifies both profits and losses. Select the leverage level that aligns with your risk tolerance.
Place Your Order: Review your order details, including the contract, quantity, leverage (if applicable), and order type (e.g., market order, limit order). Once you're satisfied, place your order.
Monitor Your Position: After your order is filled, closely monitor your short perpetual futures position alongside your spot BTC holdings.
Adjust or Close Your Position:
If the BTC price drops as you anticipated, your short perpetual futures position will generate profits, offsetting potential losses in your spot holdings.
If the BTC price rises, you can close your short perpetual futures position to avoid further losses and benefit from the price appreciation of your spot BTC.
Learn more about perpetual swap contracts on Flipster.
Types of Hedges
Short Hedge: The most common type of hedge, where you take a position that profits if the price of your asset goes down. For example, if you hold Bitcoin and are worried about a price drop, you could sell Bitcoin futures contracts on Flipster.
Long Hedge: Used when you want to protect against a potential price increase. For example, if you plan to buy Bitcoin in the future but are worried the price might rise, you could buy Bitcoin futures contracts on Flipster now to lock in the current price.
Direct Hedge: Involves using a derivative that is directly based on the asset you want to hedge. For example, if you hold ETH and want to hedge against price declines, you would use ETH futures contract on Flipster.
Cross Hedge: Uses a derivative to hedge based on a correlated asset. For example, if you hold Litecoin (LTC) and Flipster doesn't offer LTC derivatives, you could use Bitcoin futures contracts to hedge, as LTC and BTC price movements are often correlated.
Crypto Hedging Strategies with Perpetual Futures
While the basic application of perpetual futures for hedging involves opening a short position to offset potential losses in your spot holdings, there are more nuanced strategies you can employ to fine-tune your risk management.
Adjusted Hedge Ratio
Instead of a 1:1 hedge ratio (where your perpetual futures position size perfectly mirrors your spot holdings), you can adjust the ratio to manage your risk exposure more precisely.
Partial Hedge: If you want to mitigate some risk but still maintain upside potential, consider a partial hedge. For example, if you hold 1 BTC and are mildly concerned about a price drop, you might open a short perpetual futures position for 0.5 BTC, hedging only half of your spot holdings.
Variable Hedge: Actively adjust your hedge ratio based on your evolving market outlook and risk tolerance. If you become more bearish, increase your hedge ratio; if you become more bullish, reduce it.
Dynamic Hedging: When dynamic hedging, you’ll actively manage your perpetual futures position based on changing market conditions.
Adjusting Position Size: If your initial hedge proves insufficient (e.g., the market drops more than anticipated), you can increase the size of your short perpetual futures position to strengthen your hedge. Conversely, if the market moves in your favor, you can reduce your position size.
Reversing Your Hedge: In some cases, you might even reverse your hedge entirely. For example, if you initially hedged against a price drop but the market unexpectedly rallies, you could close your short perpetual futures position and even open a long position to capitalize on the upward momentum. Flipster has a feature called Instant Flip which allows users to quickly swap your short perpetual futures position into a long position with just one action, making it great for reversing hedges.
Hedge Crypto Positions on Flipster
Hedging with derivatives is a powerful tool to manage potential loss, reduce portfolio volatility, and navigate the complexities of the crypto market.
Flipster offers a high-performance trading environment tailored to the needs of experienced traders. Sign up for an account on the Flipster website or by downloading the Flipster app (Android or Apple).