As the cryptocurrency market braces for the outcome of the United States presidential election on November 5, 2024, experienced traders are deploying sophisticated hedging strategies to protect their portfolios from the extreme volatility that typically accompanies major geopolitical events. With Bitcoin trading at approximately $67,800, Ethereum near $2,397, and the total market capitalization at roughly $2.25 trillion, the stakes are substantial. This tutorial walks through advanced hedging techniques that go beyond simply selling assets and waiting out the storm.
The Objective
Hedging in cryptocurrency markets aims to reduce the risk of adverse price movements without necessarily liquidating your core positions. Unlike traditional markets where hedging tools have decades of established practice, crypto markets offer unique instruments and opportunities that require specialized knowledge. The goal is to construct a portfolio that maintains exposure to potential upside while limiting downside risk to a level you can tolerate. Technical analysis for early November placed Bitcoin support around $66,000 and resistance near $69,500, suggesting a well-defined range that could break dramatically in either direction following the election result.
Prerequisites
Before implementing any of these strategies, you need several tools and a solid understanding of derivatives markets. A verified account on a major derivatives exchange that supports options and futures — such as Deribit for Bitcoin and Ethereum options, or Binance and OKX for perpetual futures — is essential. You should understand the basics of options pricing, including the Greeks (delta, gamma, theta, vega), and how implied volatility affects option premiums. Finally, ensure you have sufficient capital allocated specifically for hedging costs, as these strategies require upfront expenditure that reduces your net returns if the market moves favorably.
Step-by-Step Walkthrough
Step 1: Assess your portfolio’s exposure. Calculate the total value of your cryptocurrency holdings and determine which assets contribute the most risk. A portfolio heavily weighted toward Bitcoin has different hedging needs than one diversified across multiple altcoins. For example, if you hold 1 BTC at $67,800 and 10 ETH at $2,397, your total exposure is approximately $91,770, with Bitcoin representing approximately 74 percent of your portfolio risk.
Step 2: Determine your hedge ratio. Decide what percentage of your portfolio value you want to protect. A full hedge (100 percent) effectively locks in current values but eliminates upside potential. A partial hedge (30 to 50 percent) provides meaningful downside protection while preserving most of your upside exposure. For an event-driven scenario like the U.S. election, a partial hedge of 40 to 60 percent is commonly recommended by professional risk managers.
Step 3: Select your hedging instrument. Put options provide the most straightforward protection. Purchasing a Bitcoin put option with a strike price near $65,000 and an expiration date one to two weeks after the election creates a floor under your Bitcoin holdings. If BTC drops below $65,000, the put option gains value, offsetting your spot losses. The cost of this protection — the option premium — depends on implied volatility, which tends to increase before major events. Perpetual futures offer an alternative approach: opening a short position equivalent to your desired hedge ratio directly offsets spot exposure.
Step 4: Execute the hedge. Place your orders before the event, not during it. Liquidity often deteriorates and spreads widen dramatically during high-volatility events, making execution costly and unpredictable. Set limit orders at your predetermined levels and let the market come to you. If using options, consider spreading your purchases across multiple strike prices to balance cost and protection levels.
Step 5: Monitor and adjust post-event. Once the election results are known and the initial market reaction has settled, evaluate whether to maintain, adjust, or close your hedge. If the market moves in your favor and your puts expire worthless, the cost of the hedge was your insurance premium. If the market moves against you, your hedge should offset most or all of the losses within your protected range.
Troubleshooting
Several common issues arise when implementing crypto hedges. First, implied volatility often spikes dramatically before major events, making options expensive. If premiums seem excessive, consider using a collar strategy — buying a protective put while selling a covered call at a higher strike price. The call premium offsets the put cost, though it caps your upside. Second, funding rates on perpetual futures can become extreme during volatile periods, increasing the cost of maintaining short hedge positions. Monitor funding rates closely and consider transitioning to options if perpetual costs become prohibitive. Third, liquidity on smaller altcoin derivatives is often insufficient for meaningful hedges. In these cases, hedging Bitcoin exposure as a proxy can provide partial protection for correlated altcoin holdings.
Mastering the Skill
Advanced hedging requires continuous practice and refinement. Start with small positions to build intuition for how different instruments behave under various market conditions. Keep a trading journal documenting your hedging decisions, the market context, and the outcomes. Over time, you will develop a personal framework for assessing risk events and selecting the most appropriate hedging strategies. Remember that the objective is not to profit from hedges but to protect your core portfolio so that you can continue participating in the market regardless of short-term volatility. The best hedge is one you never need to rely on, but the most valuable skill is knowing how to deploy one when conditions demand it.
This article is for educational purposes only and does not constitute financial advice. Derivatives trading involves significant risk and may not be suitable for all investors. Always conduct your own research and consult a qualified financial advisor before engaging in hedging strategies.
the $66k-$69.5k range they mention was real tight. i was running short strangles on Deribit the whole week before the election, printed hard
short strangles in a $3.5k range with election volatility is ballsy. how wide were your wings?
short strangles in a tight range with binary event risk is pure variance. works until the one time it doesnt and you lose everything
degen_404 ran short strangles through election week too. IV was crushed before the vote and then the range broke. classic vol crush into gamma explosion
funding rate arb works great until the range breaks. election night was exactly that, anyone running that strategy got stopped out in 30 minutes
iv_crush 30 minutes is generous. the range broke and my stop got slipped 400 bucks on deribit. funding arb in a $3.5k band with binary event risk is just selling volatility with extra steps
Soren L. 400 bucks of slippage on a stop loss is why nobody runs funding arb through binary events. the hedge costs more than the position
the real hedge is having cash on the sidelines. everything else is just managing how much you lose on the hedge itself
Good overview of the hedging toolkit but the article skips over perpetual futures funding rates. When BTC is range-bound like that, shorting perps while holding spot is cheaper than buying puts.
Marcus W. funding rate arb in a 3.5k band with election risk is just selling vol with extra steps. youre short gamma disguised as a delta neutral play
marcus nailed it, funding rate arbitrage was the play. most people overpay for puts near events when implied vol is crushed
funding rate arb is underrated because most retail traders dont understand the mechanics. great point marcus
most retail traders skip it because perp funding flips negative during dumps and you end up paying to hold the hedge. its not free money
negative funding during dumps is the hidden cost nobody mentions. your hedge starts bleeding when you need it most
dae-jung kim the funding flip is brutal. held a short perp hedge through election night and funding went to -0.04%. bled out on the hedge while spot dumped. cost me more than the position i was protecting