Cryptocurrency Hedging Strategies Analysis: Why Are Many Investors Deeply Trapped in Losses

Cryptocurrency hedging is a risk management tool, but in practice, it often becomes the root cause of many investors’ pitfalls. This involves not only operational complexity but also hidden psychological traps. Through real cases and experience sharing, this article reveals why seemingly rational hedging strategies ultimately lead investors to massive losses.

What is Cryptocurrency Hedging and Arbitrage

The core logic of cryptocurrency hedging is “locking in prices.” The most common approach is to buy spot (for example, purchasing $10,000 worth of a coin) while simultaneously opening a short position on a contract (short $10,000 USDT, 1x leverage, or $5,000 with 2x leverage—higher leverage increases the risk of liquidation). Another method is transferring funds to a leveraged trading platform, borrowing coins to short on spot, while opening a long position on the contract.

Unlike hedging, arbitrage emphasizes “profiting from price differences.” When the same trading pair has price discrepancies across different exchanges, or when funding rates are abnormal, investors can perform arbitrage for risk-free gains. Hedging, on the other hand, is to lock in the price of existing assets, allowing for peace of mind when staking, mining, participating in token snapshots, IEOs, and other activities.

The Core Logic of Hedging Operations

What is the purpose of executing hedging? Simply put, it is to lock in profits and avoid risks. You can hold spot assets while opening a short contract, so regardless of market rises or falls, your asset value remains stable. This is similar to secondary market mining—conceptually risk-free.

However, in practice, a difficult problem arises: Not all tokens can be borrowed. For example, after Ethereum’s merge, some tokens on ERC chains were borrowed short, while many obscure tokens (like HSC, KCS, etc.) are surprisingly easy to borrow. This depends on the exchange’s lending inventory and market demand.

Typical Loss Stories of Three Veteran Investors

Case 1: From Millionaire to Online Escape

Investor A became rapidly wealthy during the 2017 bull market, reaching a net worth of 10 million. His way of getting rich was simply catching the bull market wave with multiple all-in bets—entirely based on luck rather than skill. Notably, he was steady and able to hold long-term, so he easily profited during continuous upward trends.

However, luck eventually ran out. During the bear markets of 2018-2020, his steady personality—holding without selling—caused his assets to shrink from 10 million to 100-200K. Theoretically, the bull market after the 312 event should have been his comeback opportunity; with his holding capacity, turning 200K into 2 million was not impossible.

But he made a fatal mistake. At the bottom range, he couldn’t resist touching contracts. Continuous losses led him to sell off bottom-fetched altcoins to cover margin. When the bull market finally arrived, he had no capital left. Now, he has completely exited the market.

Case 2: Destroyed by His Own World

Investor B had accumulated over 2 million assets through P2P trading before entering crypto. He was steady but unexpectedly did not profit during the 2017 bull run—rather, he watched friends in his circle get rich.

This contrast fueled his investment desire. But then, a bear market suddenly hit. During the bear, he started “messing around,” blindly trading various altcoins. He wouldn’t listen to advice; even occasional profits made him more confident, living in his own world. Ultimately, he lost everything—not because of contract liquidation, but due to blind speculation on altcoins.

An economic crisis followed—he and his spouse separated, and their marriage was on the brink of collapse.

Case 3: The Analyst’s Self-Destruction

Investor C was a contract analyst, and in 2017, he worked with me on a proxy investment business. He quickly accumulated wealth through proxy trading and contract operations, earning 5 million—already a huge achievement for ordinary people.

But he fell into self-inflation. If he had stopped trading then and shifted to participating with the community in the big bull market—rising from Uniswap, arbitrage, mining opportunities—his wealth would have skyrocketed. Unfortunately, he was obsessed with contract analysis, missing all major opportunities.

Eventually, he started “robbing Peter to pay Paul,” and losses turned into debt. Now, that is a topic I prefer not to mention.

Common Causes of Losses in Cryptocurrency Investment

From these three real stories, we can summarize the core reasons for investor losses:

Psychological Loss of Control:

• Mistaking “luck” for “ability,” leading to overconfidence
• Losing each trade, telling oneself “this is the last one,” but never stopping
• Humans can’t always be lucky, but they can always be unlucky

Operational Traps:

• Inability to control gambling urges, investing more than one can afford
• Not selling during rises, hoping to hold longer
• Not cutting losses during declines, blindly waiting for rebounds
• Being brainwashed by signal groups, blindly copying trades

Cognitive Gaps:

• Making trading decisions based on feelings rather than data
• Falling for scams, being hacked, joining pump-and-dump groups
• Having no awareness of risk management

Conclusion: Recognize the Essence of Hedging

Cryptocurrency hedging itself is a valuable tool, but only if you have sufficient self-control and correct understanding. The root cause of many investors’ losses is not the hedging strategy itself, but the inability to distinguish luck from skill, resist greed, and maintain discipline.

If you have already earned substantial profits through investing, stop chasing higher returns. The crypto market always offers opportunities, but preserving existing wealth is often more important than chasing quick riches. Sometimes, laziness and lack of ideas lead to losses, but blind actions tend to cause even greater damage.