The Good Tech Companies - How to Hedge Bitcoin Futures Efficiently and Affordably

Starting point is 00:00:00 This audio is presented by Hacker Noon, where anyone can learn anything about any technology. How to hedge Bitcoin futures efficiently and affordably by John Stoy and journalist. Byline. Jason Phillips Bitcoin Futures allow market participants to manage exposure to BTC price fluctuations without selling their holdings. A hedge can reduce downside risk, provide portfolio stability, and improve capital efficiency. This guide explains the basics of Bitcoin futures, how hedging works, the difference between perpetual and fixed maturity contracts, and key factors that affect hedge-castand effectiveness. Understanding Bitcoin Futures and hedging basics, a Bitcoin futures contract is an agreement to buy or sell BTC at a fixed price on a future date.

Starting point is 00:00:45 Futures are often used for hedging. Instead of selling Bitcoin, a holder can take a short position in a futures contract, which gains value if BTC prices fall. Exchanges such as Cracken offer Bitcoin futures and details of contract specifications can be found on Cracken Futures. When a futures position is used as a hedge, it offsets changes in spot BTC value. A short futures contract increases in value as the underlying acid declines, which can compensate for losses in held Bitcoin. The effectiveness of the hedge depends on the size of the futures position relative to the size of the spot holding. Types of Bitcoin Futures, there are two main categories of Bitcoin Futures contracts. Perpetual contracts do not have an expiry date and rely on funding payments exchanged

Starting point is 00:01:31 between long and short positions to keep prices aligned with spot markets. Fixed maturity contracts, by contrast, settle on specific dates such as monthly or quarterly expirations, and they do not involve ongoing funding costs. Perpetuals are commonly chosen for open-ended hedges, while fixed maturity contracts can be preferable for situations where the desired hedge aligns with a defined time frame. Calculating a hedge ratio, hedging requires aligning the size of the futures position with the amount of Bitcoin exposure being protected. A simple formula is often used. Hedge ratio equals spot value divided by futures price, for example, if someone holds $150,000 worth of Bitcoin in the relevant futures contract trades at $148,000, the ratio is roughly 1.01. The calculation the N needs to be

Starting point is 00:02:21 adjusted for contract size, since different venues may list standard, micro, or linear contracts. Many exchanges provide calculators to simplify this process and to incorporate contract specifications directly. Cost factors in hedging. The cost of maintaining a hedge depends on several elements. Trading fees are charged when opening or closing contracts, and these are published by each exchange. Cracken's fees are detailed in its fee schedule. Perpetual contracts also include funding payments exchanged at regular intervals. Depending on market conditions, these payments may benefit short positions or increase their cost. Leverage also plays a role. While higher leverage reduces the amount of collateral required, most hedgers use moderate levels in order to reduce

Starting point is 00:03:05 the risk of forced liquidation. Implementing a hedge, establishing a hedge begins with determining the appropriate hedge ratio. The trader then selects whether a perpetual or fixed maturity contract is most suitable. Collateral is posted to meet margin requirements, and the hedge is entered by opening shore positions sized to match the underlying exposure. Positions are then monitored and adjusted if the amount of spot Bitcoin held changes or if market conditions shift. Reduce-only orders are sometimes used toned sure that a hedge does not unintentionally increase exposure. Risk management strategies. Effective risk management is essential when using futures for hedging. Stop Losan take profit orders can be set to define outcomes in advance.

Starting point is 00:03:48 Margin can be allocated in different ways. Isolated margin confines risk to a single position, while cross margin spreads collateral across the account but can expose all positions if losses accumulate. Many hedgers maintain collateral well above the maintenance requirement to lower the chance of liquidation. For ongoing or larger hedges, automation through APIs or alerts can assist with rebalancing and monitoring. Frequently asked questions, how do I size a Bitcoin futures hedge? The hedge ratio, calculated as spot value divided by futures price, provides the required number of contracts.

Starting point is 00:04:23 The figure must then be adjusted for the size O Fech contract listed on the exchange. What are funding payments in perpetual contracts? Funding is a periodic transfer between long and short positions designed to keep perpetual contract prices aligned with spot markets. When funding is positive, longs pay shorts. When negative, shorts pay longs. Which type of contract is more cost-effective for hedging? Perpetual contracts provide flexibility but include funding costs. Fixed maturity contracts avoid funding altogether but may require rolling into new contracts once they expire. Can BTC be used as collateral? Some exchanges allow Bitcoin or other digital assets to be posted as margin. Policies vary by venue. Thank you for listening to this.

Starting point is 00:05:08 this Hackernoon story, read by artificial intelligence. Visit hackernoon.com to read, write, learn, and publish.

The Good Tech Companies - How to Hedge Bitcoin Futures Efficiently and Affordably

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.