CEX blog. IO | Hedging strategies in the cryptocurrency market

It is important to understand that hedging is not primarily a way to make money, but an opportunity to minimizerisks and preserve your funds in a constantly changing market. Hedging is useful for leveling exchange rate risks in the present, as well as for fixing the exchange rate for the future.

Let's take a look at a few examples of how hedging works and how such strategies can help.

Example 1

You are a miner - mine Ethereum.You need to pay in fiat currency (dollars, euros, rubles) for electricity, mining equipment, personnel, and so on. Right now the ETH to fiat rate is high, but you think that in a month it might fall (or you just decide that now the price is right). However, you have not yet mined the ether for sale. This takes time, and you know what it is - roughly a month. In these conditions, it is beneficial for you to open a short position (short position) in ETH/USD on CEX.IO Broker. Thus, you will fix the rate for selling ether that does not yet exist.

In a month, when will you have in your armsmined ETH, you can sell it on CEX.IO and close the position on Broker. As a result, you will receive fiat in the amount corresponding to the exchange rate at the time of the short opening, and not at the time of the sale of ETH. The entire transaction price for you is the cost of opening a position and the cost of overnight (position transfer). This is a direct relationship. The longer you hold a position, the more you pay to “maintain” it.

Example 2

The exact same example works withpeople / organizations that have contracts with payment in cryptocurrencies. If you have to be paid in crypto in the future, then you can open a “short” position (short) and hedge the rate now, and close the position already at the time of settlement. If, on the contrary, you have to pay yourself, then the process is the same, but in this case you need to open a long (long position).

Example 3

There are also situations when you have topay a large amount of crypto in a month, but you don't want to buy all the crypto now. In this case, you can open a hedge position with leverage - this way you will place, say, 20% of the amount in the broker's account, but will fix the rate for the entire volume.

There is a risk that if the price moves against youquickly and forcefully, your position may be cancelled. And then, even if the price returns and moves “in your direction,” it will be too late. As a result, you will lose money on the hedge and will not receive a fixed rate. Therefore, it is risky to open a hedge with high leverage. If you do this, you need to carefully monitor the situation.

Example 4

If you are an arbitrageur and trade on a spot exchange(for example, CEX.IO) and adhere to, say, a delta-neutral strategy (that is, you try to ensure that the balance for each of your assets does not decrease, but only increases), then you have different options at your disposal.

For example, usually if you bought 1 BTC for USD,you try to immediately buy 1 BTC for USD at a better price somewhere else - this strategy requires a lot of capital (you need to currently have enough USD elsewhere) and also involves quite a lot of costs, since commissions on market orders (takers) on spot exchanges are usually relatively high.

Alternatively, you can go long,for example, on CEX.IO Broker. And on CEX.IO or another spot exchange, move your buy offer so that it looks more attractive. Ideally (if everything is calculated correctly), someone will then sell you 1 BTC for USD, and you will be able to close the hedge at the broker without having to buy back on spot, as usual. The cost of such an operation is many times lower - usually commissions for opening a position on futures exchanges and on CEX.IO Broker are several times lower than commissions on spot exchanges. And they also require significantly less capital - on Broker you only need to have a certain amount of BTC to be able to open long and short positions on various pairs (for example ETH/USD and ETH/EUR), and even with leverage. While hedging on another spot exchange, you would need to have corresponding significant capital in both currencies.

Well, if you do arbitration for severalpairs (e.g. BTC / USD and ETH / EUR), the savings are enormous. You can hold a collateral in BTC on CEX.IO Broker to open buy and sell hedging positions on both pairs (ETH / EUR, BTC / USD). It will also be possible to save on the amount of required collateral, since the unrealized loss on one position can be offset by the unrealized profit on another.

Here are some examples of hedging that we believe will help you minimize your risk. Any more ideas? Write in the comments, we will be glad to know your opinion and discuss.

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