Hedging Against Market Volatility

In addition to speculation, traders can also hedge against market volatility and mitigate risk. Hedging involves opening positions that offset potential losses in existing holdings, thereby protecting traders' portfolios from adverse price movements.

For example, a trader holding a significant amount of Bitcoin (BTC) may choose to hedge their position by opening a short position on BTC perpetual futures contracts. In the event of a market downturn, the profits from the short position can help offset losses incurred on their spot holdings, effectively hedging against downside risk.