The correct way to open crypto hedging and why you always lose money

What is Cryptocurrency Hedging?

Hedging is essentially using opposite positions in spot and derivatives markets to lock in price risk. For example, you hold $10,000 in spot assets and simultaneously short $10,000 in futures (1x leverage, or 5,000U with 2x leverage). Or, through margin borrowing, sell spot assets short, and go long in derivatives.

When should you hedge? There are two scenarios:

First: Price differences or funding costs are time-consuming. This is arbitrage. For instance, when there is a price gap between spot and futures, or when the funding rate in derivatives is positive, you can profit from these mechanisms.

Second: Need to lock in prices. If you want to hold a coin for staking, mining, participating in snapshots, IEOs, or token sales, but want to avoid price volatility risk, hedging is useful. Essentially, hedging is a risk management tool, not a get-rich-quick scheme.

Why Hedge?

Simply put, hedging is about locking in profits and ensuring the safety of your principal. Like secondary mining, many see profits but end up losing their principal.

Borrowing assets also requires knowledge. Not all exchanges can lend the assets you want. For example, during the ETH merge, tokens on the ERC chain were borrowed and shorted without much attention. Conversely, some obscure public chains like HSC, KCS are easier to borrow. Choosing the right exchange is crucial.

Three Typical Types of People Losing Money in Cryptocurrency Investment

Making money can sometimes be just a matter of laziness and mindset. But stories of losing money are plentiful. Here are three real cases:

Case 1: Contract addiction — from 10 million to 0

A guy in 2017 had a net worth of 10 million. How did he make it? No secret, just caught the bull market, went all-in a few times, and with luck, easily made 10 million. He was stable and able to hold.

Then came the bear market (2018-2020). He still hesitated to sell. The 10 million shrank to 1-2 million. After 2013, a big bull market, with his cautious personality, turning 200K into 2 million was no problem. But he impulsively traded derivatives, repeatedly losing at the bottom, selling some altcoins to cover losses. When the bull finally arrived, his principal was gone, and he completely quit.

Lesson: Derivatives are like drugs; rational understanding and actual operation are often opposite.

Case 2: Blind following — from 2 million in P2P to divorce

A friend earned over 2 million in 2017 before the bull market. He was cautious and planned to wait. But people around him were making money in crypto, influenced by FOMO, and jumped in.

When the bear market hit, he started gambling on altcoins, ignoring advice. Occasionally lucky to make some money, but then he became even less receptive to advice, living in his own world. In the end, he lost everything—not just from derivatives, but from altcoin losses. Result? Living apart and facing divorce.

Lesson: Profits from following the trend often come with losses from following the trend.

Case 3: Overconfidence — a 5 million contract analyst’s debt life

A contract analyst, in 2017, managed funds for me. Early on, through managed accounts and derivatives, he quickly accumulated 5 million. For an ordinary person, that’s a huge amount, and he should have stopped.

But he didn’t. He became obsessed with contract analysis, missed the entire big bull market afterward. He didn’t participate in the most profitable opportunities like Uniswap, arbitrage, or mining. In the end, his derivatives account was wiped out, borrowing from one place to cover another, ending up in debt.

Lesson: Sometimes, the biggest risk isn’t the market, but overconfidence and FOMO.

The Real Reasons You Lose Money

Behind these stories are common pitfalls among crypto investors:

1. Contract addiction. Knowing the risks but unable to resist. Repeated losses but keep playing, telling yourself “just one more trade.”

2. All-in mentality. Going all-in impulsively. Feeling like a genius when lucky, but actually gambling.

3. Inability to cut losses. Not willing to sell when rising, holding on. Not willing to cut losses when falling, hoping for a rebound.

4. Subjective bias. Getting trapped in your own analysis, ignoring different opinions. When lucky, even less receptive to advice.

5. Getting scammed or manipulated. Joining signal groups, following strange signals, or being hacked or scammed.

6. Trading by gut feeling. Relying on intuition rather than data, essentially gambling.

Final Advice

People can’t always be lucky, but they can always be unlucky. Never mistake luck for skill. If you’ve already made 100K or hundreds of thousands in crypto, that’s already impressive for most. Don’t FOMO, don’t go all-in.

The essence of crypto hedging is risk management, not a get-rich-quick scheme. Use it to lock in existing profits rather than chasing bigger gains with derivatives. Remember these stories of loss, compare them with your recent operations, and maybe it can save you once.