Entering cryptocurrency trading requires a deep understanding of hedging mechanisms. Hedging is a strategy that helps traders protect their investments from unforeseen losses. In this article, we will explore how hedging works on the Binance platform, discuss the differences between COIN-Margined and USDⓈ-Margined futures, and explain how to use leverage for risk management.

What is Hedging? 

Hedging is a method of reducing risk by opening opposite positions in the futures market. For example, if you have an asset on the spot market that starts to decline in value, you can open a short position in the futures market to offset these losses.

Hedging Example 

Suppose you bought 1 BTC at $60,000 on the spot market. Suddenly, the price starts to fall, and you want to protect your investment. You open a short position in the futures market using 1 BTC as collateral. If the price continues to fall and reaches $50,000, the losses on the spot market will be offset by the gains from the short position in the futures market.

Types of Futures Contracts on Binance

Binance offers two main types of futures contracts: COIN-Margined and USDⓈ-Margined. Each has its own features and advantages.

COIN-Margined Futures 

COIN-Margined futures are settled and collateralized in cryptocurrency. This means you use cryptocurrency (e.g., BTC or ETH) as collateral to open a position. Key advantages of these contracts:

• No need for stablecoins: You can hold your crypto assets and use them as collateral.
• Ideal for HODLers: Profits are calculated in the same cryptocurrency, allowing you to grow your long-term assets.
• Quarterly futures available: These contracts do not incur funding fees when held for up to three months, making them cost-effective.

USDⓈ-Margined Futures 

USDⓈ-Margined futures are collateralized and settled in stablecoins (USDT or BUSD). Key advantages of these contracts:

• Linear profit structure: Easier to calculate profits and losses since they are expressed in stablecoins.
• Versatility: You can use the same stablecoin for different contracts, reducing conversion costs.
• Ideal for market strategies: These contracts are suitable for traders who want to quickly enter and exit positions using short time frames.

Hedging with Leverage on Longer Time Frames 

Using leverage allows traders to open larger positions than their current capital. This is particularly useful when hedging on longer time frames, where significant collateral is needed to protect the position.

Leverage Example

Assume you want to hedge your long position of 1 BTC on the spot market. You open a short position in the futures market using 10x leverage. This means you only need 0.1 BTC as collateral to open a position of 1 BTC. If the BTC price continues to fall, the profit from the short position will offset the losses on the spot market.

Importance of Risk Management 

Hedging and using leverage require careful risk management. It is important to understand that high leverage increases both potential profits and possible losses. Here are some risk management tips:

• Use Stop-Loss Orders: This will help limit your losses in case of sharp market movements.
• Regularly Review Your Positions: Ensure your hedging strategies remain relevant in changing market conditions.
• Avoid Overleveraging: Using too much leverage can lead to quick liquidation of your positions.

Conclusion 

Hedging with futures on the Binance platform is an effective way to protect your investments on the spot market. Choosing between COIN-Margined and USDⓈ-Margined futures depends on your trading goals and preferences. It is important to remember the risks and use risk management strategies to minimize potential losses.

If you want to learn more about hedging and other trading strategies, check out the "Daytrading Futures" course on the Tradium platform. We offer structured lessons, practical sessions, and support from experienced traders. Subscribe to our @tradiumcrypto channel to stay updated and start your successful trading journey today!

Useful Links
- Managing Risks with Hedge Mode in Crypto Futures Trading
- COIN-Margined or USDⓈ-Margined: What Futures Contract Suits You?