Introduction
The new type of investment that people are following these days is in the form of a digital platform. Digital trading has completely changed the market and the returns are also changed due to increased use. In the traditional times when people mostly relied on share markets and other economic markets, the trading was done in a limited and controlled manner. The losses and gains depend upon the market stability and options were low. But as soon as digital markets came into being the options of trading increased. The opportunities increased and as a result, more people got associated with the chain. It was all the result of digitization in the form of smartphones and the internet that people got control of all of the happenings around by these best apps for crypto trading. The digital market is open throughout the clock and has better facilities as compared to the share market and other social and economic markets.
What is hedging?
The returns of crypto markets are impressive but the system is decentralized. Thus, the controlling authority is none as in a share market. There is no one to answer and thus you are on your own. The gains are yours and so are the losses that are too unquestionable. Thus there is a risk associated with the digital market. Hedging is a risk management technique that helps its investors and other parties to take care of their losses and thefts. It can be considered as insurance that protects the investors against any type of loss. Thus, it is a simple technique of risk management, just like there is disaster management in the real world. The only difference is that the entity involved in it is economic.
Why is it necessary to hedge cryptocurrency?
As discussed earlier, the crypto market is highly unstable due to its decentralized nature. The asset which is in millions in the daytime may be in stones and dust by the night. So the risk of investment is big, really big. Though just like the share market there is fluctuation and then recovery of the asset, but you never know which asset will come back at maximum times. It is seen that if an asset goes down, it will take many years for it to get back to its stable position and that too when conditions prevail. Some investors believe that the period of fluctuations in the period of money making. As a result, they sometimes expose themselves to serious market conditions and it is the time when hedging is required. The hedging helps the investors during this time to protect themselves from the serious threat of loss.
Procedure to hedge crypto assets
Though many strategies are considered in case of loss mitigation the popular ones that are used are portfolio diversification, short-selling, and derivative usage.
Portfolio diversification
As the word suggests the portfolio of assets should be large so that there should be some option to select when the investor witnesses unfavorable changes in its favorite portfolio.
Short-selling
It is another technique of hedging wherein the assets are analyzed and it is noted when the prices are unfavorable. As soon as the prices are down the assets are sold without any delay to protect himself from loss.
Use of derivatives
Derivatives are the items that take their value from some underlying or inactive asset. The most famous derivative is the future. It helps the trader to take some sort of position much ahead in time to help to mitigate the losses. Thus, one can easily see that hedging is important for an investor.
