A How-to Guide On Hedging With ETFs

Hedging With ETFs

There has been a rise in fascination with cryptocurrency investment. Bitcoin, the indisputable king of the crypto market, has recently reached its all-time high, with prices reaching more than $18,000 per coin. However, this might not necessarily be good news for investors – notorious volatility is one of the cryptocurrencies’ main traits, making them less attractive to some people.

Imagine investing into a currency that could lose 30% overnight without any clear indication why! Thus it’s no surprise why so many investors are looking for ways to hedge their crypto position if something like this happens again. And since traditional hedging instruments such as futures and options are either too costly or complex to come by in this market, investors might consider using ETFs or index funds instead.

What hedging means

First of all, it’s essential to understand what hedging means. In general terms, hedging is a trading strategy that helps investors reduce the risk from adverse price movements in an asset by entering into a position in a related derivative, such as futures or options. This way, when the market moves unfavourably, your losses will be mitigated by gains from another investment in your portfolio.

For example, if you have a long position in bitcoin and decide to hedge that position with short positions on bitcoin futures, then going short on bitcoins won’t affect your profits much if the price crashes just after you have opened up the short positions because you will be able to close them for profit at the same time.

Hedging is done by using futures and options.

Hedging is primarily done using futures and options, both derivatives that derive their value from an underlying asset. The most common example for this is the S&P 500, a benchmark index representing the average performance of 500 large-cap stocks in U.S. markets.

So if you want to hedge your stock, then you should find an ETF that tracks S&P 500 or at least invest into one when you have a long position because it will help protect you from market volatility when it comes. If you’re looking for “the best” stock to invest in, let me suggest you look at this excellent service. They also offer up-to-date news and videos about stocks, markets, and anything involving finance.

Multiple crypto assets

However, just like most things in the cryptocurrency world that go against usual trading rules, there is no single crypto asset to invest in either. While investing in bitcoin might be a good choice since it dominates the market with almost 50% of total capitalization, it is still very volatile. It has a high risk associated with it despite its recent meteoric rise.

So if you are looking for a less risky investment, you can consider hedging your bitcoin position by using S&P 500 ETF instead. As of writing this article, SPDR Trust (SPY), which tracks the performance of the S&P 500 index, has an exposure of 53% to tech stocks – one of the largest sectors in the USA stock market. It’s a clear indicator that investing in this ETF will help you hedge against the risk of a sudden crash in the bitcoin market even if S&P 500 index goes down.

Exotic options

Of course, not all cryptocurrencies and assets can be hedged with traditional derivative tools. More exotic options such as prediction markets and binary options, which are still largely unexplored territory, might also offer ways to reduce your portfolio risks, but this article won’t cover them.

Bottom line

If you’re an experienced cryptocurrency investor, it’s easy to see why most people who want to enter the cryptocurrency world usually invest in the best ETF to buy now, which is either BTC or ETH since they are currently dominating the whole market with almost 60% of total capitalization between them.

Read also: Risk of Bitcoin Investment That You Must Know

A How-to Guide On Hedging With ETFs

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