Due to the extremely volatile nature of cryptocurrencies, traders often have to lose a significant amount in the market because they either to failed to act quickly or they simply could not maintain the USD value of their crypto holdings when uncertainty grew. There are not many solutions to this particular problem, but there is one high-performance cryptocurrency exchange (delving in both spot and derivative markets) called BitYard which offers synthetic hedging to help users. It is important to note that the main goal of synthetic hedging is to maintain the USD value of cryptocurrencies held by a trader in a highly volatile market situation.
BitYard has named this feature “BitYard Inverse Perpetual Futures” and launched it on their official website not too long ago. Seeing the current situation of crypto markets, lots of traders have been struggling to stay afloat. For them, the option of Inverse Perpetual Futures comes as a saving grace from the team of BitYard, the Singapore-based highly advanced crypto exchange. Let us break down the mechanism of the newly-released Inverse Perpetual Futures option for new traders who would like to give it a try to outmanoeuvre the drastic market environment.
First off, let’s dig into the concept of synthetic hedging. It can be explained as below:
Synthetic hedging offered by BitYard is nothing but a simple term for using a certain financial function to hold a 1x leverage sell short position on the exchange platform in order to achieve the hedging objective. Therefore, in the case of BitYard Inverse Perpetual Futures, traders are required to place one 1x leverage sell short position with all of their crypto assets to maintain its overall USD value even in a bearish market.
Here’s an example;
A trader buys Bitcoin using the BitYard Fiat Gateway function when the price of BTC/USD was approximately $50,000 (say). Suppose that the trader did not indulge in opening/closing any position and simply held onto the 1 Bitcoin bought and kept within the BitYard account.
Now, the trader’s 1 BTC will have its value unchanged (at $50,000) if it is withdrawn from BitYard to another spot exchange to convert it into $50,000 (after excluding any withdrawal fees).
Case 1: The price of BTC/USD pair depreciates to $25,000
The value held by the trader’s Bitcoin would also change to $25,000 if he goes on to withdraw his asset from the BitYard platform before converting it into USD at another spot exchange (excluding any withdrawal fees).
This means that the trader has suffered from a loss of a total of $25,000 due to the market’s movement causing the depreciation of BTC/USD price.
Case 2: The price of a BTC/USD pair jumps to $100,000.
The value held by the trader’s Bitcoin would also equal $100,000 if he decides to withdraw the asset from the BitYard platform before converting it into USD at another spot exchange (excluding any withdrawal fees).
It also means that the trader was able to gain a total of $50,000 due to the market’s upward movement causing the raised value of the BTC/USD pair.
But this situation can be mended by using synthetic hedging with the help of BitYard Inverse Perpetual Futures in a different way. First, a trader buys 1 bitcoin in the same way and at the same price say, $50,000 as described in the example above from BitYard.
But immediately after buying Bitcoin, the trader ends up opening a 1x leverage sell short position with the value of BTC balance held in his account.
- If BTC/USD value remains unchanged, then the trader’s position would neither gain profit nor suffer any losses (except for any trading fees).
- The BTC held by the trader would maintain its original value which is $50,000.
Case 1: BTC/USD value depreciates to $25,000.
- According to the formula for calculating Profit & Loss for the BitYard Inverse Perpetual, the trader’s position could gain a profit of 1 Bitcoin.
- If the trader chooses to close his 1x leverage sell short position opened at the time of buying Bitcoin, then his total account balance would be 1 BTC (initial balance) + 1 BTC (profit from closing sell short position) = 2 BTC (excluding any trading fees).
This way, even when the market is ultimately bearish, traders using the BitYard Inverse Perpetual Futures get 2 BTC and the total value of their account becomes= 2 BTC x $25,000= $50,000.
Case 2: BTC/USD value jumps to $100,000.
- Using the same P&L formula applicable for BitYard’s Inverse Perpetual, the trader’s position would suffer from a loss of 0.5 BTC as he had opened a 1x leverage sell short position.
- If the trader chooses to close that position then the total balance within his BitYard account would be 1 BTC (initial) – 0.5 BTC (loss from closing sell short position from before) = 0.5 BTC (excluding any trading fees)
As a result, even though BTC/USD pair has been up by twice its previous value, the trader would have 0.5 BTC within their BitYard trading account. The total value held would be= 0.5 BTC x $100,000 = $ $50,000.
From the aforementioned examples, we can conclude that by opening a 1x leverage using a 1 BTC balance, a trader can hold on to its true value without worrying about the volatile market conditions and thrive in a bearish market.