How to Use Crypto Derivatives to Hedge Against Market Volatility

How to Use Crypto Derivatives to Hedge Against Market Volatility

Recent volatility in crypto markets has become a cause for concern for many traders and investors due to the unpredictability of current asset pricing. Traditional traders using leveraged products and investors pursuing their investment strategy are now finding that it’s becoming more difficult to trade profitably or invest wisely.

The risks involved in trading and investing can however be mitigated using derivatives trading, which can allow for exposure to potentially volatile crypto assets without owning the underlying asset. A derivative is a contract between two or more parties, where the value is based upon an underlying asset.

Derivatives products are traded heavily in traditional markets but remain underused in crypto markets. This is largely due to price fluctuations, the unpredictability of the market and their relative infancy.

The three forms of derivatives most often used in traditional markets are swaps, futures, and options. Futures and options are popular trading products on the cryptocurrency market as they typically seem to move in waves of bullish and bearish patterns, which can indicate future asset prices.

Futures are financial contracts where two parties, one buyer and one seller, agree to exchange an underlying asset for a specified price at a future date. The buyer has the obligation to buy the underlying asset, and the seller has the obligation to sell at or before the contract’s expiry.

Options trading involves buying and selling options, which are contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a set price if it moves beyond that price within a determined time frame.

Both forms of trading allow traders to greatly mitigate losses and maximize ROIs. By using derivatives contracts, volatility in crypto markets continues to present both mitigated risk and greater opportunity for traders and most importantly, helps them hedge against volatility in a more balanced fashion.

Overall, the main use for derivatives contracts is hedging against potential volatility, which is rife in crypto markets. Traders that want to reduce market uncertainty use derivatives to protect themselves from market changes that would put profit at risk.

This can be anything from changes in the price of the underlying crypto asset, external news, an exploit or general swings in market behaviour. The benefits of derivatives, especially in the crypto industry, are that they provide risk protection for a wide range of investments whilst providing an array of options that all mitigate risk.

One of the more prominent ways that derivative products can provide a much-needed hedge is your ownership of the asset. With futures or options, you aren’t required to own the underlying crypto asset to open a position, meaning that you can speculate on the price of an asset without ever having to worry about potential price deviations.

Depending on the type of contract you use, you’re simply betting on whether the price will go up or down, or reach a certain price point by a set date. Another benefit of derivatives is that you can take advantage of markets that are falling in price as well as those that are rising. This essentially enables users to short-sell without having to borrow bitcoin. This is very important for hedgers, as protection against declining assets is essential.

Derivatives trading also allows crypto traders to utilize low-risk assets through open futures contracts that utilise gold and other commodity-backed assets. These contracts provide crypto traders access to physical gold and other products, which are often seen as less volatile than crypto assets.

They have been in high demand on many derivatives exchanges as they provide crypto traders with a way to protect their portfolio value in times of widespread uncertainty due to the recognised value of the underlying asset.

Stablecoins futures contracts are also emerging as popular products due to their widespread use in the crypto industry. As the industry continues its rampant demand for stable assets amid fears of increasing inflation, stablecoins offer a "safe-haven" asset and an underlying asset that can provide a valuable hedge.

The array of products available also covers all eventual outcomes, as traders using futures contracts mitigate directional risk whilst options protect against rising or falling market volatility. In relatively unstable markets like crypto, this can help traders generate more profits whilst also protecting themselves.

As crypto derivatives markets mature and develop into more recognised products, more traders are now participating in derivatives contracts as a hedge. Crypto options markets have existed for a few years now. However, a majority of crypto traders find options trading difficult to understand and intimidating. It does have a steep learning curve and requires an invested knowledge of markets and potential catalysts for price changes.

As proven in traditional markers, the long-term success and sustainability of a crypto derivatives market could help to reduce the long-term volatility of the industry as a whole. Now, exchanges such as Bitget offer market-leading derivatives products that enable traders worldwide to trade volatility risk without taking any directional risk.

These products provide a way for traders to hedge in times of high market uncertainty and protect themselves against different kinds of risks. Derivatives products also offer the potential for greater profits than through spot or leveraged trading due to the stability and mitigated risk provided through trading contracts.

The Bitget platform provides exceptional features for crypto traders, including more than 20 derivatives contract trading pairs for leading major cryptocurrencies and USDT based margin trading. The Bitget platform features the only preset TP/SL feature in the industry alongside the ability to flash open and close positions, set liquidation tiers and a one-click reversal option.

Bitget also features the world's largest crypto derivatives copy trade platform, where users can copy, follow and track the trades of thousands of leading, reputable traders.

Crypto derivatives have seen rampant growth but do remain untouched by a majority of traders. Now, as the risks increase and markets become more volatile due to various global factors, the need for a safer hedge against the volatility such as Bitget’s derivatives products becomes imperative for traders.




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