Is hedging the same as short selling?

No. Short selling is a speculative bet that the price will fall. Hedging uses short positions specifically to protect existing long holdings. The intent and risk profile are different.

Does hedging guarantee I won't lose money?

A perfect hedge (1:1 same asset) theoretically prevents losses, but also prevents gains. Partial hedges reduce but don't eliminate risk. Costs like funding rates and fees apply.

When should I remove a hedge?

Remove it when the event you were hedging against has passed, when your market outlook changes, or when the cost of maintaining the hedge outweighs the protection.

Can I hedge crypto in the USA?

Yes. Kraken offers futures trading for US residents which can be used for hedging. dYdX is another option for non-custodial hedging.

Hedging with Margin Trading: Protect Your Portfolio

Hedging is one of the most legitimate and valuable uses of margin trading. Instead of speculating on price direction, hedging uses leveraged positions to protect existing investments from adverse price movements. It's like buying insurance for your portfolio.

What Is Hedging?

Hedging means opening a position that profits when your main investment loses value, offsetting (or reducing) the loss. In margin trading, this usually means opening a short position against a long-term holding.

Simple Hedging Example:

You hold 1 BTC bought at $40,000 (long-term investment)
You're worried about a short-term correction
You open a 1 BTC short on perpetual futures
If BTC drops to $35,000:

- Your spot holdings lose $5,000 - Your short profits $5,000 - Net result: $0 change (you're "hedged")

Types of Hedging Strategies

1. Full Hedge (Delta Neutral)

Short the exact same amount as your long position.

Protection: 100% downside protection
Cost: You give up all upside too
Use when: You expect a significant drop but don't want to sell your holdings (tax reasons, staking, etc.)

2. Partial Hedge

Short a portion of your holdings (e.g., 50%).

Protection: Reduces losses by the hedged percentage
Cost: You keep partial upside exposure
Use when: You're uncertain and want to reduce risk without eliminating upside

3. Options Hedge (Protective Put)

Buy put options that profit when the price drops.

Protection: Full protection below the strike price
Cost: Premium paid for the option (fixed, known cost)
Use when: You want defined-cost insurance with unlimited upside potential

4. Correlated Asset Hedge

Short a correlated asset instead of the exact same one.

Example: Hold BTC, short ETH (high correlation)
Protection: Imperfect but often sufficient
Cost: Risk of correlation breakdown
Use when: Direct hedging is not available or too expensive

When to Hedge Your Portfolio

Before Major Events

FOMC meetings (interest rate decisions)
CPI data releases
Earnings announcements (for stocks)
Token unlock events (for crypto)
Regulatory announcements

During Uncertain Markets

When you can't determine a clear trend
When technical indicators show mixed signals
When macro conditions are deteriorating

For Tax Optimization

Instead of selling (triggering capital gains tax), hedge with a short
Maintain your long-term holding period
Remove the hedge when the risk passes

Practical Hedging Guide

Step 1: Determine What to Hedge

Identify the specific assets and amounts you want to protect.

Step 2: Choose Your Instrument

Perpetual futures: Most common for crypto hedging
Quarterly futures: No funding rate costs
Options: Known cost, flexible strikes
CFDs: For traditional asset hedging

Step 3: Size Your Hedge

Full hedge: Match your spot position size 1:1
Partial hedge: Choose 25-75% based on your conviction

Step 4: Use Cross Margin

Cross margin is ideal for hedging because profits from one side offset losses from the other, reducing liquidation risk.

Step 5: Monitor and Remove

Set a plan for when to remove the hedge
Don't forget about it — funding rates cost money
Remove when the event passes or market stabilizes

Hedging Costs

Funding Rates

If you hold a short perpetual futures position during a bullish market (positive funding), you'll receive funding payments. In a bearish market, you'll pay them.

Opportunity Cost

While fully hedged, you don't benefit from upside movements.

Slippage and Fees

Opening and closing the hedge costs trading fees on both legs.

Basis Risk

If hedging with a correlated (not identical) asset, the correlation can break down.

Real-World Hedging Scenarios

Scenario 1: BTC Holder Before FOMC

You hold 2 BTC ($100,000) and want to protect against a hawkish surprise:

Open a 1 BTC short on perpetuals (50% hedge)
Use 2x leverage (margin: $25,000)
Cost: ~0.04% fees = $40 to open
If BTC drops 10%: Lose $10,000 on spot, gain $5,000 on short = net -$5,000 (vs -$10,000 unhedged)
If BTC rises 10%: Gain $10,000 on spot, lose $5,000 on short = net +$5,000

Scenario 2: Stock Portfolio Hedge

You have $500,000 in US stocks and expect a market pullback:

Buy SPY put options or short SPY futures
Or use CFDs to short an index via IG Markets or IBKR
Protect against market-wide decline while keeping individual stock positions

Hedging Platforms

Best for Crypto Hedging:

Binance: Highest liquidity, lowest funding rates
Bybit: Clean interface, portfolio margin
Kraken: Best for US residents

Best for Stock/Portfolio Hedging:

Interactive Brokers: Lowest margin rates, widest product range
IG Markets: Spread betting (tax-free in UK) + CFDs

*Disclaimer: Hedging reduces but does not eliminate risk. Imperfect hedges can still result in losses. This is educational content, not financial advice.*