Hedging Crypto Collateral’s Dollar Value with Derivatives
Summary
This educational note explains how a trader holding BTC as collateral can reduce the account’s exposure to BTC’s dollar price without selling the coins for dollars. It compares three approaches: shorting a perpetual swap, shorting a dated future, or combining a short at-the-money call with a long at-the-money put. In the example, a short position equal in dollar value to the BTC balance offsets the collateral’s price exposure, keeping the account’s dollar value approximately stable as BTC moves.
Each instrument has a different cost or limitation. Perpetual swaps involve funding payments that may help or reduce returns; futures avoid funding but can trade at a premium or discount to the index; options may reproduce the short exposure but can be less convenient and more costly to execute because of spreads. The explanation assumes a matched hedge and presents an idealized relationship. Actual results can differ with fees, execution, funding, contract pricing, and position sizing, especially over longer holding periods.
Key ideas
- A BTC holder can approximate a dollar-value hedge by shorting derivatives in an amount matching the account’s BTC value.
- A perpetual swap is designed to track the underlying price, but its funding payments introduce an ongoing variable.
- A futures hedge avoids periodic funding, while its premium or discount to the index affects the hedge economics.
- A short at-the-money call paired with a long at-the-money put can synthetically approximate a futures short.
- The hedge depends on matching exposure and can be affected by execution costs, contract pricing, and funding.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.