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How to hedge your crypto portfolio: five methods, what each costs, and how to size them

A hedge is a position that gains when your portfolio loses. Every hedge costs something to hold, and the whole skill is paying the least for the protection you need, for as long as you need it.

Three decisions come before the choice of instrument, and most hedging guides skip them: what you are hedging, how much of it, and for how long. This page starts there, then covers five methods with what each costs, works a sizing example with real arithmetic, and ends with the part most people skip, which is when to take the hedge off.

Nothing here is advice. It is the mechanics, with the trade-offs stated.

Key takeaways​

  • Decide what, how much, and how long before choosing an instrument. Most bad hedges are the right instrument on the wrong question.
  • Five methods: perpetual shorts, put options, stablecoin rotation, inverse tokens, and a delta-neutral overlay. Each pays for protection in a different currency: funding, premium, opportunity, decay, or complexity.
  • A perp short is the cheapest hedge when funding is negative and the most expensive when it is high. Check the rate before you open it.
  • A hedge you forget to remove is a short position. Set the exit condition when you set the hedge.

Step 1: Decide what you are hedging​

Write down the holdings you want protected, by asset and dollar value. A portfolio that is 60% BTC, 25% ETH, and 15% stablecoins has two things to hedge and one that needs none.

Then decide the reason. Hedging against a specific event with a date, an unlock, a macro announcement, a tax deadline, is a short-dated hedge with a clear end. Hedging because you are uneasy is an open-ended hedge, and open-ended hedges are the ones that cost the most because nobody decides when they end.

Step 2: Decide how much​

You do not have to hedge all of it. The hedge ratio is the share of the exposure you neutralise. A 100% hedge makes you indifferent to price, which is the same as selling. A 50% hedge halves your drawdown and halves your upside.

Pick the ratio from the drawdown you can tolerate, not from a round number. If a 40% fall in BTC would force you to sell at the bottom, hedge enough that the same fall becomes tolerable. If it would not, you may not need a hedge at all.

Step 3: Decide how long​

A hedge with an end date can use an instrument that expires, an option or a dated future, and the cost is known up front. A hedge without one needs an instrument you can hold indefinitely, a perp short or a stablecoin rotation, and the cost accrues daily.

Set the removal condition now: a date, a price level, or the event passing. Hedges without a removal condition become permanent shorts by neglect.

The five methods​

MethodHow it worksWhat it costsBest forWatch for
Perpetual shortShort the asset's perp for the hedged notionalFunding, paid or received hourly or every 8hOpen-ended hedges when funding is low or negativeLiquidation on the short during rallies; funding spikes
Put optionsBuy puts at a strike below spotPremium, paid up frontDated hedges against a crashPremium is lost if nothing happens; liquidity on smaller assets
Stablecoin rotationSell part of the position for stablecoinsOpportunity cost; possibly a tax eventSimplicity; no margin to manageRe-entry timing; taxes
Inverse tokensHold a token engineered to move opposite the assetRebalancing decay over timeShort holds without a margin accountDecay in choppy markets; smart-contract risk
Delta-neutral overlayHedge and earn funding on the hedged portionComplexity; venue and execution riskLong-term holders who want the hedged part to earnIt is a strategy, not just a hedge

Perpetual short​

Short the asset's perpetual contract for the dollar amount you want hedged. If the asset falls 20%, the short gains 20% of the hedged notional and the holding loses the same. Funding is the cost: when it is positive, you receive it as the short; when negative, you pay it.

That makes a perp short a hedge that can pay you. In leverage-heavy markets, shorts collect funding from longs, which is the same payment a delta-neutral strategy harvests. In fear-driven markets, funding flips negative and the hedge costs money.

The risk is the short leg's margin. A rally moves the short toward liquidation even though your holding is gaining the same amount, because the venue does not net them unless you are on one that supports cross-margining spot against perps. Post enough margin, or hold the spot on the same venue, and watch it during rallies.

Put options​

Buy puts at a strike below spot with an expiry after the event you are hedging. If the asset falls below the strike, the put pays the difference. If it does not, the premium is gone.

The cost is the premium, known up front, which makes puts the cleanest dated hedge. The trade-off is that premium in crypto is expensive because volatility is high, and out-of-the-money puts on anything but BTC and ETH have thin liquidity. Deribit is the main venue; onchain options markets exist and are smaller.

Stablecoin rotation​

Sell part of the holding for stablecoins. It is the simplest hedge, it needs no margin, and it has no ongoing cost except the upside you forgo if the asset rises.

The catches are that selling may be a taxable event in your jurisdiction, and that buying back requires a decision most people make late. The stablecoins themselves can earn while parked; the USDC yields page covers where.

Inverse tokens​

Products such as Toros's short and bear tokens on dHEDGE give you a token that moves opposite the asset, without a margin account or a perp position. Hold it in a wallet like any other token.

The cost is rebalancing decay: a token that resets its exposure daily loses value in a choppy market even if the asset ends flat. That makes inverse tokens suitable for short holds and expensive for long ones. Smart-contract risk applies. The Toros comparison covers the platform.

Delta-neutral overlay​

If part of your portfolio is going to be hedged for a long time, the hedged portion is a delta-neutral position, and delta-neutral positions can earn. Hold the asset, short the perp against it, and collect funding on the short. The hedge is the same as the perp-short method; the framing changes from "cost of protection" to "hedged capital that earns".

This is what funding-rate strategies do, and it is a strategy rather than just a hedge: it needs margin management, a venue, and attention to funding regimes. For the stablecoin portion of a portfolio, Deploy Finance's Income: Funding Rates runs that position from a wallet you control on Hyperliquid, with a session key that can trade and cannot withdraw. It does not hedge holdings you keep elsewhere; it holds its own hedged position and collects the funding that hedgers on the same venue are paying or receiving. If you were going to sit part of the portfolio in stablecoins anyway, that part can earn from the same market that prices everyone else's hedge.

A worked sizing example​

The numbers are illustrative, not a recommendation.

A $50,000 portfolio: $30,000 BTC, $12,500 ETH, $7,500 USDC. The holder can tolerate a 25% drawdown on the whole portfolio, and expects a volatile month.

  • A 40% fall in BTC and ETH unhedged loses $17,000, or 34% of the portfolio. Too much.
  • Hedging 50% of the BTC and ETH exposure means shorting $15,000 of BTC perp and $6,250 of ETH perp. The same 40% fall now loses $8,500 on the holdings and gains $8,500 on the shorts on the hedged half, so the net loss is $8,500, or 17%. Tolerable.
  • Margin: at 3x leverage on the shorts, the holder posts about $7,083 of margin, which the USDC covers. Liquidation on the shorts sits roughly 33% above entry; a rally that large would also have gained about $7,000 on the unhedged halves, so the holder should add margin from that gain before the shorts are at risk.
  • Cost: if 8-hour funding averages 0.01%, the shorts receive about $0.03 per $100 per day, or about $6 per day on $21,250 of hedge. If funding averages −0.03%, they pay about $19 per day. The holder checks the rate before opening and again weekly.
  • Exit condition: the volatile month ends, or BTC falls 25% and the holder wants full exposure again at the lower price.

The arithmetic is not complicated. The discipline is the exit condition.

When to take the hedge off​

The hedge comes off when the reason for it ends: the event passes, the date arrives, the price reaches the level you set. It also comes off when it has done its job. A hedge that gained 30% while the holding lost 30% has realised its value; keeping it on is a bet that the fall continues.

Two failure modes. Removing the hedge because it is losing money in a rally, which is the hedge working, not failing. And leaving it on because nothing bad happened yet, which turns protection into a permanent drag. Write the exit condition down when you open the hedge, and follow it.

Mistakes that cost the most​

  1. Hedging without a removal condition. The most expensive hedge is the one still on a year later.
  2. Opening a perp short without checking funding. At high positive funding the short is paid; at negative funding it is a daily cost. Look first.
  3. Under-margining the short. The rally that threatens the short is the rally that gains on the holding. Move margin across.
  4. Hedging 100% and calling it a hedge. That is selling with extra steps and a margin account.
  5. Buying inverse tokens for a six-month hold. Decay does the damage.

Verdict​

Decide what, how much, and how long. Use a perp short for open-ended hedges when funding is low or negative; puts for dated hedges against a crash; stablecoin rotation when simplicity beats everything; inverse tokens for short holds without a margin account. If the hedged portion is going to stay hedged, treat it as delta-neutral capital that can earn, and hold it somewhere the funding accrues to you.

Then write the exit condition down before you do any of it.

Learn more​

Start with Deploy Finance​

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