In exchanges, using pre-market contracts for hedging is a very common and important risk management strategy in the cryptocurrency market. Below, I will explain in detail how to operate and what happens after the project goes live.
Part One: Using pre-market contracts for hedging
1. What are pre-market contracts?
Pre-market contracts usually refer to futures contracts launched on the futures market of certain exchanges (such as Binance, Bybit, OKX, etc.) before a cryptocurrency project officially lists on mainstream exchanges (for spot trading). You can trade the 'future price' of this token in advance, but delivery or settlement waits until the project officially goes live.
2. What is the logic of hedging?
The core idea of hedging is: establish a position in one market to hedge against price risks of related assets in another market.
In the cryptocurrency circle, the most common scenario is:
· You hold private placement shares or airdrop qualifications for the project: You obtained tokens at a very low price (e.g., $0.05) in the early stages of the project. You are concerned that at the time of the project launch, the market price (e.g., $0.50) may be lower than the pre-market contract price (e.g., $1.00), or that the overall market may decline, leading to a loss of your profits.
In this case, you can utilize the pre-market contract for a selling hedge.
3. Specific operation examples:
Scenario: You obtained 10,000 XYZ tokens through private placement, with a cost price of $0.05. The market price of the pre-market contract is $1.00.
Your goal: Lock in current profits around $1.00 and hedge against the risk of price decline after going live.
Operation steps:
1. Open positions in the futures market: At an exchange that offers XYZ/USDT pre-market contracts, sell contracts worth 10,000 XYZ. Assuming the contract value is 1 XYZ per contract, you will need to sell 10,000 contracts.
2. Analysis of hedging effects:
· Scenario one: After the project goes live, the spot price plummets to $0.20.
· Your spot assets: 10,000 XYZ * $0.20 = $2,000. You still have profits compared to the cost price, but compared to the price of $1.00, you 'missed out' on $8,000.
· Your futures account: The contract you sold at $1.00 can now be bought back at $0.20 to close the position. Futures profit = (selling price - buying price) * quantity = ($1.00 - $0.20) * 10,000 = $8,000.
· Total assets: $2,000 (spot value) + $8,000 (futures profit) = $10,000. You successfully locked in the total asset value at $10,000 (i.e., around the price of $1.00 per token).
· Scenario two: After the project goes live, the spot price skyrockets to $2.00.
· Your spot assets: 10,000 XYZ * $2.00 = $20,000.
· Your futures account: The contract you sold at $1.00 now needs to be bought back at $2.00 to close the position, resulting in a loss. Futures loss = ($1.00 - $2.00) * 10,000 = -$10,000.
· Total assets: $20,000 (spot value) - $10,000 (futures loss) = $10,000.
· Conclusion: Regardless of price fluctuations, through hedging, your total assets are locked in at approximately $10,000. You give up additional gains from price increases, but at the same time, you also avoid the risk of price decreases.
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Part two: What will happen after the project officially goes live?
The official launch of the project is a critical time point that will have a significant impact on the pre-market contract and the entire market.
1. Contract settlement and delivery
Pre-market contracts do not exist indefinitely. At a specific time after the project officially goes live and spot trading begins, the exchange will settle or deliver the pre-market contract.
· Settlement method: Usually, the average price from multiple spot exchanges within a certain period after going live (e.g., within the first hour after opening) is used as the final settlement price. Your futures positions will be closed at this price, and profits and losses will be directly recorded in your account.
· After delivery: The pre-market contract will stop trading. After that, the exchange may launch standard perpetual contracts for users to continue trading.
2. Price convergence
This is the core of the hedging theory. At the moment the project goes live, the price of the pre-market contract will quickly converge towards the true price of the spot market.
· If the pre-market contract price is higher than the spot opening price, the contract price will fall.
· If the pre-market contract price is lower than the spot opening price, the contract price will rise.
Whether your hedge is perfect depends on the difference between the settlement price and your spot selling price (i.e., basis risk).
3. Market volatility sharply amplifies
The moment the project goes live is usually when market volatility is most intense, for the following reasons:
· Long-short competition intensifies: All long and short positions accumulated in the pre-market contract will seek to close or convert at this moment, leading to a surge in trading volume.
· Spot selling pressure and buying: Investors with low-cost tokens like you might directly sell their tokens for cash in the spot market, while optimistic investors will buy, creating a huge divide.
· Liquidity shock: Although there is liquidity in the pre-market contract, the liquidity in the spot market is usually insufficient right after the market opens, and large orders can easily cause drastic price slippage.
4. The end of the hedging strategy
After the project goes live and the contract settles, your hedging operation will automatically end. You need to reassess based on the situation after settlement:
· You still hold spot tokens.
· Your futures account records the profits or losses of this hedge.
· After that, if you want to continue hedging spot risks, you need to trade the perpetual contract for that token to establish new hedge positions.
Summary and risk warning
Advantages:
· Effectively locking in profits: A vital risk management tool for early investors.
· Avoiding downside risk: Preventing asset shrinkage due to changes in market sentiment, project performance not meeting expectations, etc.
Risks and precautions:
1. Basis risk: Hedging is not perfect. Your spot selling price and futures settlement price may not be exactly the same, and this difference is called basis, which can bring additional profits or losses.
2. Exchange risk: Be sure to choose mainstream, reputable large exchanges. Small exchanges may have risks such as manipulating settlement prices or liquidity depletion.
3. Liquidity risk: The trading depth of certain small projects' pre-market contracts may be very poor, making it difficult for you to establish a sufficiently large hedge position at an ideal price or to close positions with significant slippage.
4. Opportunity cost: As mentioned above, if the price rises sharply, you will sacrifice potential additional profits.
5. Technical operation risk: Using leverage, margin calls, and other mechanisms requires close attention to avoid liquidation due to extreme volatility, leading to hedging failure.
In summary, using pre-market contracts for hedging is a very mature and effective strategy, but it is designed as a protective tool for investors holding spot positions (such as private placements and airdrops), not for risk-free arbitrage. The official launch of the project is the endpoint and climax of the entire process, and the market will complete the final pricing through price convergence.
