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Hedging against risk with futures

Hedging against risk with futures

Explainers Trading

22 Apr 2021

The cryptocurrency market can be very volatile, and traders are always looking for ways to hedge against quick price movements. In this article, you will learn how you can limit your risk with futures on AAX.

Futures allow you to trade an asset without owning any of it. Instead, you put up some assets as collateral to speculate on the price of a cryptocurrency.

You can go short or long while trading futures. Traders go short when they anticipate a drop in the value of an asset and go long when the price is expected to go up.

How Do I Hedge Against Risk With Futures?

Futures can be used to hedge against risk when trading cryptocurrencies. This means, futures trading can be used to reduce the effects of the volatile nature of crypto when trading.

For instance, you hold $200 worth of BTC, and you are not sure about the next price action. In such a situation, you will not want to exit the market even though you may run into a loss. You could hedge against risk by trading futures on AAX.

You can set a BTC short position with $20 USDT at 10x leverage (which is also equal to $200). At this point, if the price of bitcoin falls drastically, you will lose value on the BTC you own. However, your $20 short position with 10x leverage will allow you to make your losses back on the futures market.

If you do it really well, you would be able to exit your short position once the price has dropped, take your profit, and when the price of BTC jumps back up, you’ll have increased your overall holdings.

This example is one of many ways traders hedge against risk with futures. In this case, they do not suffer a complete loss during an upside or downside in price movement.

Traders can use a similar strategy or other strategies to hedge against risk with futures while holding an asset or making investments.

How Do I Trade Futures on AAX?

Trading futures on AAX is simple. Click on the 'Futures' drop-down menu at the top navigation bar and select BTC settled or USDT settled futures.

The two options differ in terms of the underlying currency. USDT settled futures require you to have a USDT balance. BTC futures, on the other hand, require you to have BTC in your wallet.

On the trading interface that loads, you can place your order on your screen's right panel. Check the contract price and enter the amount of BTC/USDT you want to spend.

Next, click either the 'Long' or 'Short' button to initiate the trade. You will see a pop-up with a description of your trade's terms. Review the terms and click 'Confirm.'

Learn more about trading futures here.

Are you ready to put your skills to the test?

AAX is the world’s first digital asset exchange to be powered by LSEG Technology. Offering OTC, spot, and futures, it provides a highly secure, deeply liquid and ultra-low latency trading environment; and a meeting point between crypto and global finance.

Open an account with AAX, or download the app, and experience the next generation crypto exchange.

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