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Crypto markets are unpredictable. Today you might find yourself in profit and the next day you might be losing.
Losses are inevitable in this market, but the amount of loss you suffer gives you an edge, and this is where crypto hedging comes in.
𝗪𝗵𝗮𝘁 𝗶𝘀 𝗖𝗿𝘆𝗽𝘁𝗼 𝗛𝗲𝗱𝗴𝗶𝗻𝗴?
Crypto hedging is a financial strategy utilized by traders to cut down losses in situations when the market moves against them.
This way they can offset the loss they will experience during unfavourable conditions on the asset they are trading.
𝗠𝗲𝘁𝗵𝗼𝗱𝘀 𝗼𝗳 𝗖𝗿𝘆𝗽𝘁𝗼 𝗛𝗲𝗱𝗴𝗶𝗻𝗴
➜ Futures contract: This means locking in price today for future transactions.
This way future changes of prices in the future won't lead to unwanted losses.
➜ Option trading: An options contract lets you decide if you want to buy or sell something at a certain price by a certain date, but you're not required to go through with it if you don't want to.
➜ Diversification of portfolio across different cryptocurrency is another good way of mitigating risk.
➜ Short selling: This is just borrowing an asset to sell with the intention of buying back later at a lower price to pay back to the lender.
➜ Use of stablecoins is also another method of hedging.
𝗥𝗶𝘀𝗸𝘀 𝗶𝗻𝘃𝗼𝗹𝘃𝗲𝗱 𝘄𝗵𝗶𝗹𝗲 𝗵𝗲𝗱𝗴𝗶𝗻𝗴
➝ One tends to spend more while hedging. This can be seen from paying trading fees and etc
➝ Your decision might not be perfect to remove the whole losses you would have made. This is due to how fast the market moves.
𝗛𝗼𝘄 𝗬𝗶𝗲𝗹𝗱 𝗣𝗿𝗼𝘁𝗼𝗰𝗼𝗹𝘀 𝘂𝘀𝗲 𝗖𝗿𝘆𝗽𝘁𝗼 𝗛𝗲𝗱𝗴𝗶𝗻𝗴
We all know that the aim of Yield Protocols are to enable users to earn rewards on their assets. In doing this, different strategies are used by them to make sure that the users get the best return.
Those strategies are
⤍ Delta-Neutral Strategy: Protocols like @multiplifi use this.
(I will have to talk about this on a separate thread)
⤍ Option based hedging: Yield protocols use this to cap loss when token prices drop.
That's all for now
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Thank you

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