Why Is a ‘Perfect Hedge’ Often Impractical or Impossible in Crypto Markets?
A 'perfect hedge' aims to completely eliminate all risk of loss, but it is often impractical or impossible in crypto markets due to several factors. These include the high volatility and illiquidity of many altcoins, the presence of basis risk between spot and derivatives prices, and the high transaction costs and margin requirements.
Additionally, regulatory uncertainty and smart contract risk introduce non-market risks that are difficult to hedge with standard derivatives. The cost of a perfect hedge is often prohibitive, making the strategy economically unviable.
Glossar
High Transaction Costs
Constraint ⎊ High Transaction Costs, often manifesting as elevated gas fees on congested networks like Ethereum, impose a significant constraint on the economic viability of small-scale or frequent on-chain financial activities.
Perfect Hedge
Calibration ⎊ A perfect hedge, within cryptocurrency derivatives, represents a dynamic positioning strategy aiming for zero delta sensitivity to underlying asset price movements.