Hedging aims to reduce the risk of adverse price movement in an existing position, either by taking a position opposite of one’s existing position or diversifying into other assets. In other words, hedging reduces variance by dampening the effects of the markets.
For example, if a trader uses 100% of their capital to buy Bitcoin, there is no hedge. However, if they use 50% for Bitcoin and 50% for stablecoins instead, some traders might argue that Bitcoin hedges against fiat, and the position in stablecoins hedges against Bitcoin.
A diversified portfolio is the preferred strategy for many cryptocurrency enthusiasts. In a sideways market, for example, individuals can hold onto their stablecoins or fiat to see if the market will decline in order to buy in at a lower price. Alternatively, they can hold onto their crypto assets in case prices do not drop.
