Recently, we discussed the strategy of cryptocurrency arbitrage through withdrawal. Today, let's talk about the hedging strategy:
Hedging is the ability to reduce your risks when transferring, so when hedging, it doesn't matter what happens. Whether the price goes up or down, you earn the percentage you were aiming for. Let's provide you with an example to illustrate the hedging process. For example:
There's no guarantee that during these 5 minutes of the transfer, the price won't drop by 10%, 20%, or even 30%, especially if you're arbitraging some obscure coins.
In such a case, you use the hedging strategy, which allows you to reduce risks.
The essence of hedging is that when you make this transfer, it doesn't matter what happens to the market. If the coin drops, you make a profit from the futures but lose some percentage on the spot sale. If the coin rises, you make a profit on the spot, but lose slightly on the futures.
Often, during price increases of a coin with significant volatility, the price between spot and futures on the same exchange can vary significantly.
Keep in mind that if the prices differ, for example, you plan to sell on the spot for $1.05, but you can only open a short position at $1.03, in this case, you'll earn less. This is essential to consider.
It can also happen that the spot price is $1.05, but you open a short position at $0.99, and this trade goes into a loss.
These are the two main nuances to consider in the hedging strategy.
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