Hedging: A Protection Tool or a Liquidation Trap? Learn How to Use It Safely

In the volatile world of cryptocurrency, many early investors, airdrop holders, and even KOLs experience unexpected liquidations. This phenomenon shows that hedging is a strategy that must be thoroughly understood before implementation. The paradox is: they are not betting on the direction, yet they can still go bankrupt. So what exactly is wrong? Let’s discuss thoroughly.

Understanding Hedging as a Way to Protect Asset Value from Market Fluctuations

Hedging is a strategy that uses opposing positions to protect against price fluctuations, keeping the asset’s value stable. The concept is simple yet powerful: you lock in the asset’s value without expecting big profits, only aiming for stability.

In crypto practice, hedging involves:

• Owning physical assets (for example, an airdrop worth $100,000 that will soon be claimed)
• Opening a short position of equal size in the futures market
• When prices go up or down, both positions offset each other

A clear example: If the airdrop you will receive increases by 50% to $150,000, your short contract loses $50,000. The total position remains $100,000. Conversely, if it drops 50% to $50,000, your contract gains $50,000. The result is the same: $100,000. Sounds perfect, right? But don’t rush to celebrate.

Funding Costs and Leverage: Two Main Traps in Hedging Strategies

Hedging seems safe at first glance, but it hides two deadly traps: funding costs and leverage.

Funding Costs: Erosion of Hedging Value

Every futures position incurs a funding rate fee. If you open a short to hedge, you have to pay interest. When the cryptocurrency market is highly volatile, like during trending periods of $MMT, $SOON, or $AIA, funding costs can reach staggering levels—potentially consuming all your hedging profits.

Imagine: You’re supposed to break even from hedging, but you end up losing thousands of dollars daily just on funding fees. Ultimately, your “stability” strategy results in consistent losses.

Leverage: Shortening Your Own Leash

Leverage is a multiplier that determines how long you can survive. Each leverage level drastically changes the risk profile:

• 1x leverage: Opening a short position of $100,000 requires $100,000 margin. You will never be liquidated (as long as there’s a small buffer).
• 10x leverage: Only $10,000 margin needed. But if the price rises by 9.5%, your margin is wiped out. Liquidation occurs.

Many investors feel the margin burden is too high, so they use high leverage for “efficiency.” The result? A price spike, a liquidation, and a wiped-out portfolio.

Liquidation Is Not Inevitable—Why 1x Margin Is the Standard, and Hedging Is a Safety Protocol

Liquidation is a nightmare that can be avoided. Hedging is a strategy designed not to be played with high leverage.

A safe hedging standard is: 1x margin + calculated funding costs = a truly zero-loss strategy.

High-leverage hedging = putting an ATM on your chest, waiting for the first trigger to explode.

Recent market phenomena show: market manipulators intentionally raise spot prices to force short-sellers using high leverage to cover. Investors who should be safe (because they are hedging) become the first victims. Why? Because they are using 5x, 10x, or even 20x leverage to “save” on margin.

One Simple Sentence: Hedging Is a Neutral Tool, Humans Are Dangerous

Hedging is a neutral tool—not inherently dangerous. But careless execution can turn it into a trap.

• Perfect hedging = 1x, sufficient margin, no interest in liquidation, assets truly protected
• Failed hedging = high leverage + unaccounted funding costs + a single market shock = liquidation

Remember: a true trader does not rely on luck, but on a deep understanding of market mechanics. Understand the principles before taking a position. Don’t let the “hedging” label become a mask for gambling with high leverage.

Getting liquidated once is an accident. Twice is negligence. Three times means you are still making the same mistake.

DYOR—Do Your Own Research. Understand before you play.