Hedging Bitcoin

Hedging Bitcoin

Traditionally a hedge is an investment position intended to offset potential price volatility.

In simple language, a hedge is used to reduce any substantial losses or gains. In current case a hedge is expressed in shorting bitcoin. So let’s find out how useful could be the hedging for a retail client.

Zero Risk Complete Hedge

Bitcoin CFD

Let’s say you own 10 bitcoins and the current price is $6,600. You can have an opinion that it is going to drop significantly but you do not want to sell your bitcoin. So you have a willing to reduce or to eliminate at all your temporary drawdown for the existing position.

XBroker offers an ability to do it. Due to the fact that we offer CFD for the majority of common cryptocurrencies, the bitcoin is of course among them. So while owning 10 bitcoins on your account you could sell 10 bitcoin CFD and eliminate the drawdown at all.

Moreover, you do not have to use a lot of margin to maintain the CFD position. XBroker offers up to 1:5 leverage (20%) so you need only 2 BTC (10BTC/5) in current example to have a fully hedged position.

High Leverage Low Margin

Eliminate Risks

Now we came up to the point of calculations. How our Net result is going to look like if we have 10 bitcoin and 10 bitcoin CFD sold while the bitcoin price really started to drop from the $6,600 at which we took a decision to hedge? 

So what can we see on the presented table? In the provided example bitcoin price dropped for more than 50% but owing to the opened sell on the CFD we have not got any loss and our drawdown was always equal to zero!

Current BTC price: 6,600$
Starting assets: 10 BTC equal to 66,000$
Hedging position: Sell 10 CFD BTC

Note: for CFD position maintance you need only 20% of it, i.e. only 2 BTC on your account to sell 10 BTC

Let`s assume future BTC price: 3,500$

Available assets:

  • 10 BTC equal to 35,000$
  • 10 CFD BTC with profit equal to 31,000$

Finally you close your short of 10 BTC and still have 66,000$ (35,000+31,000)

Hedging Benefit

What are the next possible steps if the bitcoin price now in this example is equal to 3500$? If you think that current price is the local low, we have to make some easy calculations again and perform some actions.

The bitcoin dropped dramatically while the CFD price dropped in line with the bitcoin spot price, so you could buy back the CFD, take a profit equal to 31000$ and have that profit offset the unrealized loss you experienced in the spot bitcoin.

As you see hedging is a vital feature that exists on the markets and that is often used by the professionals to reduce or even eliminate risks at all. XBroker offers this ability to our clients so you could benefit from it and gain profit.

Profit From Decline Overall Benefit

Hedging Benefit