We will discuss a strategy that can be used both to earn money by taking advantage of the Bitcoin price developments, which will help to increase the amount available without the need to deposit constantly, and to protect the investment you already have in Bitcoin or other cryptocurrencies.
The basic principles are buying, selling and maintaining – and we are not talking about margin trading because it is very risky.
Even if you don’t consider yourself a “bitcoin trader”, this guide can be applied because it allows you to record higher profits, but also limit your losses when Bitcoin price evolves negatively.
What is hedging and how to use Bitcoin futures in hedging
In simple terms, hedging is an action that is designed to reduce the risk of another investment. With regard to Bitcoin, hedging is the action to sell Bitcoin futures to reduce the risk of holding an investment in Bitcoin. This will help maximize profit and considerably diminish the loss of the value of the investment in Bitcoin when its price is decreasing.
The concept is simple, especially with the Bitcoin price that is growing almost constant from 2015. When the price rises, you keep your cryptocurrencies. When you predict that the price will drop, you open a Short position of Bitcoin futures on the trading platform at the highest price you can get.
After the price has dropped and you notice it’s starting to grow again, liquidate the Short position you have on Bitcoin futures. If you manage to catch the right moments, the end result will be holding the same amount of Bitcoin, plus the profit generated by the Short position on the platform, the equivalent of the Bitcoin drop. Thus, you limit the loss of your investment in cryptocurrency, caused by its depreciation, and further price increases will represent a new profit for you.
It can be done the same in the case of any other cryptocurrencies.
Hedging is considered an advanced trading strategy, but the principles on which they are based are very simple – you sell when the price is up and you buy when the price is down.
Some may consider it a difficult process or that it is not worth the effort, but that is a counterproductive attitude – in reality, it is simple as long as you use the right methods to calculate the right time for action.
In fact, this is the most difficult part – calculating the right moment requires knowledge of technical, economic and transactional analysis. You need to know how to interpret indicators such as EMA (exponential moving average-exponential mobile average).
You will need to learn the fundamental principles of technical analysis so that you can predict when price developments will take place – there are hundreds of guides and tips on Youtube and Google for free. If you dedicate a little time to learning the basic principles, then all you will need to do is to look at the price graphs that the majority of the platforms make available.
We do not recommend you to take paid trading courses, as it does not give you anything in addition to what you can find yourself, and the end result will be the same – you have to spend time reading știtile and watching prices.
What matters is that you have the concept of time. In General, traders rush to execute transactions, but eventually they learn that the price returns more slowly than I think. When the Bitcoin price rises greatly, at some point it will decrease, but you must wait for the downward trend to be clear before you make the transaction. It’s better to make sure before you make a decision, because the opportunities will always show up. It’s better to miss an opportunity than to lose money because you made an emotional decision.
Most of those who start trading do not consider themselves emotional, but I guarantee you will feel the pressure to make repetitive decisions that you will later regret. So my advice is to wait for confirmation of the trend before selling or buying.
Why is it profitable to do hedging with Bitcoin
The answer is simple – price volatility. Variations of $100 in one day are major opportunities for small traders, which are able to increase their profits as a whole.
I say that high volatility is a positive aspect because the overall trend is growth and has been like this since 2015. Every time the price rises very much, it is clear that there will be a period of decline, but up to a growing limit compared to previous years.
With all the news about great investors entering the market, it is clear that these variations will continue, which means there is room to apply the principles presented to increase the bitcoins you own. In my opinion, it is much more satisfying to trade than to buy and keep cryptocurrencies.