Can a Market Maker Use Another Crypto Asset to Cross-Hedge an Altcoin Option?

Yes, a market maker can use a highly correlated, more liquid crypto asset (like BTC or ETH) for 'cross-hedging' an altcoin option, especially if the direct altcoin market is too illiquid. This strategy is imperfect due to 'basis risk' ▴ the risk that the correlation breaks down.

The cross-hedge only partially mitigates the delta risk, but it can be a necessary compromise when a direct hedge is too costly or impossible.