Why Is Speculation Considered a Higher-Risk Activity than Hedging?
Speculation is considered higher-risk than hedging because it involves taking on new risk in pursuit of profit, rather than mitigating existing risk. Speculators are essentially betting on future price movements, and if their predictions are wrong, they can incur significant losses.
Hedging, on the other hand, is a defensive strategy designed to protect against losses. While a hedge might limit potential gains, its primary purpose is to reduce the downside risk of an existing position.
Glossar
Speculation
Objective ⎊ Speculation involves taking positions in financial derivatives based on forecasts of future price changes, aiming to generate profits from short-term market volatility.
Taking on New Risk
Capital ⎊ : This action involves the deliberate decision to allocate resources to an investment or strategy where the potential for loss is significant, often through the use of high-leverage instruments like crypto derivatives.