How Does a Market Maker Hedge the Risk from an Options Trade on a Low-Liquidity Altcoin?

Hedging low-liquidity altcoin options is challenging due to the lack of a deep spot market. Market makers primarily use delta hedging, but execution can cause significant slippage.

They might use a highly correlated, more liquid asset (if one exists) as a proxy hedge, or rely on wider bid-ask spreads and higher minimum RFQ sizes to price in the unhedgeable risk.