Hedging is a risk management strategy used to offset potential losses in investments. This post is your guide to various hedging strategies that can be employed in the crypto markets. It’s important to note that some or all of them may not be available in certain jurisdictions, so make sure that your hedging strategies comply with local regulations.

1. Futures contracts. Crypto futures contracts allow investors to agree on buying or selling a cryptocurrency at a future date for a predetermined price. For instance, if you own Bitcoin and expect a potential price decline, you could sell a Bitcoin futures contract. If Bitcoin's price does fall, the gains from the futures contract could compensate for the losses in your Bitcoin holdings.

2. Options contracts. Options contracts offer the right, but not the obligation, to buy (call) or sell (put) an underlying cryptocurrency at a set price before the contract expires. Buying a put option could be a hedge against a drop in a cryptocurrency’s price. Gains in the option's value can offset the loss in the value of your crypto holdings.

3. Contracts for difference (CFDs). CFDs are derivatives that allow speculation on the price of cryptocurrencies without the need to own the underlying asset. By entering into a CFD, you typically agree to settle the difference in the price of an asset from when the contract is opened to when it is closed. For example, opening a short position on a Bitcoin CFD can hedge against downward price movements, offsetting losses in your Bitcoin investment.

4. Perpetual swap contracts. Perpetual swap contracts are designed to track the price of an underlying asset and allow continuous trading without an expiration date. For instance, if you believe that Bitcoin’s price will decline, you can open a short position on a Bitcoin perpetual swap contract. If Bitcoin’s price falls, the gains on the perpetual swap contract can help offset the losses in your Bitcoin investment. 

Learn more: How Hedging Works in Crypto and Seven Hedging Strategies You Need To Know.