Recently, various 'demon coins' are rampant in the market, staging a series of 'liquidation' dramas—project parties or whale controllers drive up spot prices, with the sole purpose of causing those who are shorting in the contract market to collectively face liquidation.
It is worth noting that in this bloody hunt, many who faced liquidation were not purely speculators, but those who attempted to engage in 'hedging' strategies, including early project investors, profit-takers, and major KOLs.
So, what exactly is hedging? This handbook, which claims to be able to 'lock in assets', why has it failed, even becoming the fuse that triggers the liquidation of its own positions?
1. Hedging: Buying a 'price insurance' for your assets
Hedging, abbreviated as hedging, is essentially a risk management strategy. Its core idea is: while holding spot assets, establish a position in the contract market that is opposite in direction and similar in size.
· Goal: Not to profit, but to lock in asset value and hedge against price volatility risk.
· Result: Regardless of market fluctuations, your total asset value remains relatively stable.
For example, understanding in one second:
Suppose you are about to receive an airdrop worth $100,000, but you are worried about a market crash when claiming the coins. How do you lock in the value of this $100,000?
You can open a short position of $100,000 in the contract market.
· Scenario A: The coin price plummets 50% before the airdrop is released
· Spot side: The value of your airdrop shrinks to $50,000, losing $50,000.
· Contract side: Your short position profits $50,000.
· Total profit and loss: 0. Successfully locked in the value of $100,000.
· Scenario B: The coin price surges 50% before the airdrop is released
· Spot side: Airdrop value rises to $150,000, unrealized profit of $50,000.
· Contract side: Your short position loses $50,000.
· Total profit and loss: 0. You have given up additional gains from an increase, but also avoided the risk of a decrease.
Look, this is a perfect hedging operation. You use a loss in one market to gain profit in another, ultimately preserving asset value.
2. Why does the safety manual fail? Two deadly traps
Since hedging is so reliable, why can it still lead to liquidation? The problem lies in the execution details.
Trap 1: The double-edged sword of leverage
Opening a short position of $100,000 can be done in two mainstream ways:
· 1x leverage: You need to deposit $100,000 as margin. Price fluctuations are almost impossible to cause liquidation, safe but with extremely low capital efficiency.
· 10x leverage: You only need to deposit $10,000 as margin. Capital efficiency is high, but risks increase dramatically—if the price moves in the opposite direction by about 9.5%, your margin will be entirely lost, i.e., liquidation.
Many hedgers choose to use leverage to enhance capital efficiency. This, however, falls right into the crosshairs of the 'whales'.
Trap 2: Targeted 'hunting'
For tokens like $MMT , $SOON , $AIA , which have small circulation and are easy to control, project parties or whales can easily use a small amount of funds to violently inflate the spot price by dozens or hundreds of times in a short period.
At this time, any leveraged hedging short position would be instantly breached at the liquidation price like paper. Your insurance strategy is vulnerable in the face of absolute power. This is not market fluctuation; it is a premeditated 'hunting'.
3. Hidden costs: Funding rates
Besides the risk of liquidation, hedgers also need to continuously pay 'funding rates'. This rate is a fee paid periodically between longs and shorts in the perpetual contract market, used to anchor the contract price to the spot price.
When market sentiment is extremely bullish, funding rates are often positive, meaning that the short side (hedger) needs to pay fees to the long side. If the rate is too high, the long-term cost of hedging can be staggering, possibly resulting in a situation where 'the coin price does not change, but money is slowly lost due to fees'.
Summary and reminder
· Hedging itself: is a neutral risk management tool used for value preservation, not speculation.
· Core principle: If you seek absolute safety, please use 1x leverage or sufficient margin, which ensures you will not be liquidated even in extreme market conditions.
· Maximum risk: Arises from using leverage and encountering market manipulation. In the face of meme coins, leveraged hedging is no different than trying to skin a tiger.
Always remember: never use any financial instrument lightly before fully understanding its rules and risks. Otherwise, you may think you are wearing a bulletproof vest, but in reality, you could become the only target.
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This article is for educational exchange only and does not constitute any investment advice. The market has risks, and operations must be cautious.
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