What Is Hedge?
A hedge is a position that offsets the risk of another position. If you hold a large Bitcoin spot portfolio, you might open a short BTC futures position to protect against a potential decline. The short gains offset the spot losses if price drops, acting as insurance for your core holdings.
How Hedge Works
Common crypto hedges include: futures or perpetual shorts against spot holdings, put options for downside protection, stablecoin allocation as a passive hedge, and cross-asset hedges (e.g., shorting a correlated altcoin when you can't short your specific holding). The cost of hedging is the premium or funding you pay for the protection, plus the gains you forgo if the market continues upward.
Why It Matters for Traders
Hedging isn't about eliminating risk — it's about managing it. Professional traders hedge when their portfolio exceeds risk limits, when macro uncertainty spikes, or when they want to lock in profits without selling (e.g., hedging to avoid taxable events). The goal is to reduce variance during uncertain periods while maintaining core exposure for the long term.