Defensive Hedging is a risk management strategy implemented to mitigate potential losses from unfavorable price movements in an investment portfolio or a specific asset position. Its primary purpose is to protect existing capital rather than to seek speculative gains.
Mechanism
This strategy operates by taking offsetting positions, often using financial derivatives such as options, futures, or perpetual swaps, to counteract the price risk of a primary holding. For example, purchasing put options on a cryptocurrency can limit downside exposure to its spot price without requiring a sale of the underlying asset.
Methodology
The strategic implementation of defensive hedging in crypto investing allows institutional participants to preserve portfolio value during periods of market volatility or uncertainty. This methodology provides a structured approach to capital protection, enabling firms to maintain long-term asset allocations while minimizing short-term downside risks, a critical consideration for crypto institutional options trading and smart trading strategies in rapidly changing markets.
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