Hedging in trading is one of the most powerful strategies to protect your portfolio from unexpected losses. The hedge acts as financial insurance, balancing your exposure and reducing risk during downturns. It can be applied whether you are holding Bitcoin or any other cryptocurrency.
In this article, we will break down what hedging is, how it works in cryptocurrency trading and how you can use it to secure profits and maintain peace of mind in volatile markets.
What is a Hedge in Trading
Hedging is a risk-management strategy designed to minimise potential losses on an investment. Instead of selling your main spot position, you take a reverse trade that moves in the opposite direction of your existing asset.
The primary purpose of a hedge is to safeguard your position during pullbacks without the need to sell your spot holdings.
This approach can also be advantageous from a tax perspective, since selling assets too early may trigger taxable events, while long-term holdings often benefit from reduced tax rates after a year. In this sense, a hedge works as a protective layer that allows traders to stay invested and secure their unrealised gains.
Why Hedging Is Essential for Traders
The primary goal of a hedge is the protection of the capital. Here are the main advantages of hedging:
- Capital Protection: Prevents large drawdowns during bear markets.
- Peace of Mind: You can step away from the charts knowing your portfolio value is stable.
- Psychological Edge: Reduces stress and emotional trading decisions.
- Tax Efficiency: Keeps long-term positions open without triggering taxable events.
- Flexibility: Allows traders to stay in long-term bullish positions while profiting short-term on corrections.
One underrated benefit of hedging is psychological stability. When you’re hedged, you stop obsessing over every candle move. Whether Bitcoin pumps or dumps, your net portfolio stays consistent.
This “peace of mind” allows you to make more objective decisions with no fear of missing out, no panic selling, and no revenge trading. You’re free to trade strategically, not emotionally.
Example of Hedging Bitcoin Holdings
Let’s say you hold 1 Bitcoin worth $100,000.
If Bitcoin drops to $50,000, you lose 50% of your portfolio value, even though you still own one Bitcoin.
By opening a short position of equal size on a derivatives exchange, you offset that drop.
When the price falls, your short trade gains value, balancing out your losses.
Your total portfolio remains worth roughly $100,000, even in a downtrend.
That’s the power of a 1:1 hedge, which is effective in neutralising risk.
Using Leverage to Hedge Efficiently
Many traders hesitate to keep large sums on exchanges, and that’s where leveraged trading helps. When leverage is used wisely, it becomes a powerful tool for portfolio protection, and not only for speculation.
For instance, with 0.1 BTC on an exchange, you can open a 1 BTC short using 10x leverage.
This fully hedges your portfolio while keeping most of your funds safely offline.
How to Hedge in Bybit
If you’re trading on Bybit, the platform offers a Hedged Mode feature that allows you to open long and short positions simultaneously on the USDT pairs. The hedged mode is ideal for traders who want to manage both spot holdings and swing trades on derivatives.
Note that this feature is currently available only for USDT-based contracts. This means you can hedge your exposure in markets like BTC/USDT, ETH/USDT, SOL/USDT or other perpetual pairs quoted in Tether.
Here’s how to enable the Hedge mode in Bybit:
- Go to your Bybit trading interface and click on the gear icon, usually located at the top-right corner of the order panel.
- Click on Position Mode. Here you’ll see the options One-Way Mode and Hedged Mode.
- Choose Hedge mode. Optionally, you can tick the option to apply it to all USDT pairs.
- Confirm to save the settings. Your account will now support simultaneous positions.
If you can’t see this option on your end, make sure you are on a USDT-based contract.
This mode is useful when you hold spot Bitcoin or Ethereum and want to hedge against short-term volatility to protect your profits.
Conclusion
Hedging in trading is a risk management strategy used by traders who protect their capital rather than react to market swings.
The purpose of the hedge isn’t to generate profits, but to secure existing gains and preserve portfolio value. Because of that, it’s a strategy applied selectively, only in specific contexts where risk protection outweighs potential reward.
When used wisely, hedging allows traders to face market volatility calmly, maintaining control during downturns. It represents a shift in mindset, from chasing every move to thinking strategically and managing risk like professionals do.
