Hedging is a process carried out to protect owned crypto assets from unstable price fluctuations.
This technique is important for every investor to understand in responding to it and to reduce the risk of loss that can occur at any time when investing.
So, to learn more about hedging in crypto and how to do it, see the full review here!
What is Hedging in Crypto Assets?
Hedging is a security strategy for the property/assets owned. The term hedging comes from English which can be interpreted as “hedging.”
Hedging protects a person’s financial condition so as not to experience losses and provides benefits.
Changes in the price of goods, changes in currency exchange rates, inflation, and interest rates cause risk in investment.
Therefore, the purpose of using hedging is as a strategy to minimize risk and cover losses.
Through this strategy, investors can prepare plans to anticipate these conditions.
In practice, hedging becomes a strategy regulated officially by government regulations.
This strategy has even been implemented in several BUMN businesses through the Standard Operating Procedure (POS) policy, officially issued by the Minister of BUMN with detail number S-687/MBU/10/204, with contents related to SOP on Hedging.
Why You Need Hedging in Crypto Assets
As a strategy/policy applied to anticipate and prevent one’s business and financial losses, hedging is, of course, significant to do. Here are some reasons.
1. Maintain financial stability
Hedging can be the best way to maintain financial stability in dealing with unpredictable changes.
During ups and downs in value, a hedging strategy can be an effective and efficient step to keep making profits and avoid losses.
2. Avoid bankruptcy
Hedging is also often used because it can help investors/companies avoid bankruptcy risk.
Of course, continuous and intolerable losses will lead a business to failure.
Now, with a hedging strategy, the risks and possible losses can be scrutinized and overcome before they have a worse impact.
How Hedging Works on Digital Assets
Hedging works on digital assets by protecting the value of an asset/instrument from the risk of too significant a loss.
Various techniques/methods can be used to implement hedging, including preparing contract documents.
In this regard, each value will be measured based on the underlying asset. Through an agreement between the two transacting parties, the possibility of loss can be minimized if there are unexpected events in the future.
Suppose an investor buys a digital asset hoping to make a significant profit.
However, various factors make the price of digital assets continue to decline. This, of course, will cause losses for investors.
However, this condition can be anticipated if investors initially implement hedging options.
How to Hedging Digital Assets
There are several ways of hedging digital assets that you can do, which are as follows.
1. Diversify assets
Hedging is a step to diversify/allocate investors’ money in various assets.
It is intended that if one asset moves in a loss, the loss can be covered by the profit from other assets.
The most common way of diversification is by buying several assets.
For example, buying several crypto assets or simultaneously buying crypto assets and mutual funds
However, this method is usually done by retail investors. Meanwhile, institutional investors/traders generally have other strategies to maintain their wealth.
2. Make use of spot and derivatives
Another way you can try is to simultaneously take advantage of the spot market and the derivatives market, such as futures and options.
In the derivatives market, transactions are carried out, namely transactions of ownership contracts for an asset.
Thus, transactions are not transactions of the original assets as in the spot market.
In addition, investors must also know that trading in derivative contracts has the option of selling without first owning assets.
The transaction has a short name if you use the futures market or a put if you use the options market. With that option, investors can reap profits when prices move down.
Advantages and Disadvantages of Digital Asset Hedging
Digital assets have been on the rise in recent years, so it is important to know the advantages and disadvantages. Here are some of the benefits.
Advantages of Asset Hedging
- The price is fast and up
The first advantage lies in its fast-rising price, which can even beat the prices of conventional investment instruments, such as stocks and so on.
- Easy to trade
Because it’s so easy to buy and sell anytime and anywhere, as long as you have an internet network, digital assets can be called very liquid.
Digital assets can also be traded 24 hours a day. This is different from stocks, which follow working days and hours.
- More transparent
Regarding information, digital assets are more transparent than other investment instruments.
The reason is that this asset uses a blockchain system, which is computational technology to create connected blocks so that all information, both transactions and asset tracking, can be known.
Therefore, you can easily find information on price developments and trading volume.
Disadvantages of Asset Hedging
Meanwhile, the disadvantages are as follows.
- Many countries still need to be ready.
Currently, many countries still need to be ready to face the growth of digital assets, for example, China, which prohibits digital asset transactions in any form.
This also indicates that regulators in several countries still need to be ready to regulate and supervise digital assets due to their rapid growth.
- There has yet to be consumer protection.
Since clear regulations are unavailable, digital asset investors cannot be protected optimally.
In Indonesia, for example, even though it has been entered and recognized by the Commodity Futures Trading Regulatory Agency (Bappebti) of the Ministry of Trade as a commodity, all trading risks will be fully handed over to consumers.
In this case, CoFTRA will only guarantee the trading platform because this digital asset is issued by a group or private individuals, not by an organization/country.
- Considered not a pure investment
Because the prices fluctuate so much, investment observers have flocked to respond that digital assets are not pure investment instruments but trading instruments.
Given the very volatile price/value, you can earn a sizable amount of profit in a short period.
However, on the other hand, you can also suffer big losses in a short time.
Digital Asset Hedging Strategy
There are several digital asset hedging strategies that you can try. Here’s a full review.
Crypto arbitrage is a strategy that uses price differences in crypto assets between markets to make a profit.
In crypto arbitrage, traders buy crypto assets at a low price on one exchange and sell them at a higher price on another, taking advantage of differences in the prices of these assets on different markets.
Crypto arbitrage can be a challenging and profitable strategy for novice traders, but it also comes with risks associated with the volatility and liquidity of the crypto market.
2. Average Down
The following strategy is average down. This technique is done by buying assets gradually when there is a price decline.
Here, the investor will buy at a lower price so that when the price rises to reach the middle of the first or second purchase price, the investor will make a profit that can cover the losses of the first purchase.
3. Close Cash
The cash cap strategy is the simplest method of hedging. Typically, this strategy is used when the price of an asset experiences an erratic decline.
To overcome this, an investor will choose to save his money in cash to protect his financial condition and reduce losses.
In conclusion, hedging is a security strategy for property or assets owned.
This term that comes from English can be interpreted as “hedging.”
Hedging itself is used to protect a person’s financial condition so as not to suffer losses while at the same time providing benefits.
Hedging needs to be done on crypto assets for two reasons. First, to maintain financial stability. Second, to avoid bankruptcy.
Several ways of hedging digital assets can be done by diversifying assets and utilizing spot and derivatives.
Meanwhile, hedging strategies for digital assets that can be implemented include arbitrage, average down, and cash closing.
It is also important to note that one way to hedge the value of hedging in investments is to diversify assets.
So, for those of you who want to hedge crypto assets, it’s a good idea to know the crypto market prices today at INDODAX Market in advance!