What Is a “Cross-Hedge” in the Context of Crypto Derivatives?
A cross-hedge involves using a futures or options contract on one cryptocurrency to hedge the price risk of a different, but highly correlated, cryptocurrency. For instance, a miner of a small-cap altcoin might use Bitcoin futures to hedge their price exposure because the altcoin's price movements closely track Bitcoin's.
This strategy is used when a direct derivatives market for the underlying altcoin does not exist or lacks sufficient liquidity.
Glossar
Correlation Coefficient
Association ⎊ The correlation coefficient, within cryptocurrency derivatives and options trading, quantifies the statistical relationship between two assets or variables, revealing the degree to which their price movements tend to coincide.
Bitcoin Futures
Derivation ⎊ Bitcoin Futures represent standardized forward contracts obligating the holder to buy or sell Bitcoin at a predetermined price on a specified future date, functioning as a derivative instrument whose value is derived from the underlying spot price of Bitcoin.
Price Exposure
Exposure ⎊ Price exposure represents the potential financial impact on a portfolio resulting from fluctuations in the market price of an underlying asset.
Derivatives Market
Derivatives ⎊ Financial instruments derive value from an underlying asset, index, or event, facilitating risk transfer and price discovery within cryptocurrency markets.