Does hedging eliminate all risk?

A full hedge eliminates directional price risk, but other risks remain: funding costs, liquidation risk on the hedge, basis risk between spot and perp prices, and execution risk. Hedging reduces risk — it does not eliminate it entirely.

Should I hedge all of my spot holdings?

Not necessarily. A common approach is to hedge 30-50% of your portfolio during uncertain periods. Full hedging locks in your current value but also eliminates any potential upside.

What happens to my hedge if the price goes up?

Your short perp loses money, but your spot holding gains by the same amount (approximately). You are market-neutral. If you want to participate in upside, use a partial hedge or remove the hedge.

How long should I hold a hedge?

It depends on your reason for hedging. Event-based hedges (e.g., around a protocol upgrade) may last days. Portfolio protection hedges during bearish periods may last weeks or months. Factor in funding costs for long-duration hedges.

Hedging With Perpetual Futures: Protect Your Portfolio - Learn

What Is Hedging?

Hedging is the practice of opening an opposing position to offset potential losses in an existing holding. In crypto, the most common hedge is shorting a perpetual futures contract against a spot position.

Protect Gains

Lock in profits from a spot position without selling the asset. Useful if you want to keep the token for governance, staking, or airdrops.

Reduce Drawdowns

Limit losses during bearish periods. Your short gains offset your spot losses, reducing the impact of a market downturn.

Stay Flexible

A hedge can be added or removed at any time. Unlike selling spot, you maintain your position and can lift the hedge when sentiment improves.

Hedging Is Not Betting Against Yourself

Hedging isn't bearish — it's prudent. Professional traders and institutions hedge constantly. Think of it as insurance: you pay a small cost (funding) to protect against a larger potential loss.

The Basic Spot Hedge

The simplest hedge: you hold a token on spot and open a short perpetual position of equal size. This creates a market-neutral position.

Identify What to Hedge

Choose the spot asset you want to protect. For example, you hold 1 ETH worth $3,000.

Open a Short Perp

Short $3,000 of ETH on perpetuals. Use low leverage (1-2x) to minimize liquidation risk.

Monitor the Hedge

If ETH drops 10%: your spot loses $300, your short gains ~$300. If ETH rises 10%: your spot gains $300, your short loses ~$300. Net result: approximately flat.

Close When Ready

When you are ready to be directional again, close the short. Your spot position remains intact.

Size Must Match

For a full hedge, the notional value of your short must equal the value of your spot holding. If your spot position grows (price rises), your short is now too small. Rebalance periodically.

Partial Hedging Strategies

Full hedging eliminates both downside and upside. Partial hedging lets you retain some exposure while reducing risk.

Strategy	Hedge Ratio	Use Case
Light Hedge	25%	Slightly bullish but want some protection. Retains 75% upside exposure.
Half Hedge	50%	Uncertain direction. Reduces risk by half while keeping half the upside.
Heavy Hedge	75%	Leaning bearish but do not want to sell spot. Minimal upside exposure.
Full Hedge	100%	Completely neutral. Want to hold the token (for staking, airdrops) but eliminate price risk.

Example: You hold $10,000 of HYPE and want a half hedge. Short $5,000 of HYPE on perps. If HYPE drops 20%, your spot loses $2,000 but your short gains $1,000 — net loss is $1,000 instead of $2,000.

Portfolio-Level Hedging

Instead of hedging individual tokens, you can hedge at the portfolio level for more efficient capital use.

BTC as Proxy Hedge

If most of your portfolio is correlated with BTC, shorting BTC perps provides a broad market hedge. This is simpler than hedging each asset individually.

Event-Based Hedging

Increase your hedge ratio before known risk events — protocol upgrades, regulatory announcements, or token unlocks. Remove the hedge after the event passes.

Trailing Hedge

As your portfolio grows in value, increase your short size to maintain your target hedge ratio. Rebalance weekly or when the portfolio moves significantly.

Sector Hedging

If you hold multiple DeFi tokens, a single short on a DeFi index or the sector leader can provide broad protection with one position.

Costs & Trade-Offs

Hedging has a cost. Understanding these trade-offs helps you decide when hedging is worth it.

Funding Costs: If funding is positive and you're short, you earn funding. If funding is negative, you pay. Over long periods, funding costs can add up — check the current rate before opening a hedge.
Lost Upside: A full hedge means you don't profit from price increases. This is the explicit trade-off for downside protection.
Margin Requirements: Your short position requires margin, reducing your available capital. Use cross margin for hedged positions to improve capital efficiency.
Basis Risk: The perp price and spot price can temporarily diverge, causing small P&L differences between the two legs of your hedge.
Management Overhead: Hedges need monitoring — especially partial hedges that require rebalancing as prices change.

When to Hedge

Hedge when the cost of not hedging (potential drawdown) exceeds the cost of hedging (funding + lost upside). For long-term holders during uncertain markets, hedging is almost always worth it.

Start Hedging on Dexly

Dexly makes hedging straightforward — trade both spot and perpetuals from the same interface. View your combined position and manage your hedge ratio in real-time.

Open Trading View Position Sizing Guide

Hedging With Perpetual Futures: Protect Your Portfolio