What is hedging?
What does ‘hedging’ mean?
HEDGING (verb/noun) is a risk-diminishing mechanism that answers to price movements and volatility of an asset; to protect oneself against loss on (a bet or investment) by making balancing or compensating transactions.
Used in a sentence: ‘’The BTC price has hit an all-time high. I’ll be hedging some of my capital by buying ANCT to be sure that I don’t lose value when BTC’s volatile price drops again.’’
Facts to remember:
- Hedging is a safety mechanism against price volatility
- In theory, a perfect hedge eliminates the risk of loss entirely
- Hedging is usually implemented by leveraging other currencies
Term ‘hedging’ originates from economics and refers to various methods of reducing the risk of loss caused by price fluctuations. Similarly in the cryptocurrency market, hedging is used as a risk-diminishing method to protect one’s value from the daily price volatility of traditional cryptocurrencies (such as bitcoin).
At the very beginning of the Bitcoin story, there were no hedging mechanisms that could help BTC hodlers protect their assets. With the rise of the new generation of cryptocurrencies, such as stablecoins, came a simple hedging solution. Stablecoins have brought to the table something that the market could not count upon before – price stability.
Having a hedging solution is not always enough – you have to anticipate the right moment to make your trade and choose the right stablecoin as a hedging mechanism. Furthermore, the next Bitcoin halving is set to take place in May 2020, and it’s estimated that the BTC price will skyrocket following that event. Developing hedging strategies now could be extremely helpful following the halving phenomenon.
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Disclaimer: The information provided in this post is not legal, accounting, or financial advice. I am not a lawyer, accountant, or financial advisor. I am not registered as an investment adviser with any federal or state regulatory agency. The Information should not be construed as investment or trading advice and is not meant to be a solicitation or recommendation to buy, sell, or hold any cryptocurrencies.