If you’ve held crypto through a full market cycle, you know the feeling. You believe in Bitcoin’s long-term potential, but watching your portfolio drop 50% or more during a bear market tests even the strongest conviction.
Most traders face two imperfect options:
Option 1: Sell to stablecoins or fiat. This creates immediate tax reporting requirements in most jurisdictions, as you’re realizing capital gains or losses. You also lose your position size—if you sell 1 BTC at $40,000, you might only buy back 0.8 BTC if the price rebounds to $50,000.
Option 2: Hold unhedged. You maintain your position but endure the full volatility, which can mean significant drawdowns during extended bear markets.
There’s a third approach that institutional traders and risk managers commonly use: hedging with perpetual futures. This guide explains how a 1x Short position on YEX Futures can help neutralize market volatility without selling your underlying assets.
What is a “1x Short” Hedge?
A hedge using perpetual futures works by creating offsetting positions. When you hold spot crypto and open an equal short position in futures, the gains and losses theoretically cancel each other out.
Let’s illustrate with an example:
Starting Position:
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You hold 1 BTC worth $60,000
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You open a 1x Short position for $60,000 notional value
Scenario A: Price Drops to $48,000 (-20%)
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Spot position value: $48,000 (down $12,000)
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Short position profit: $12,000
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Net portfolio value: $60,000
Scenario B: Price Rises to $72,000 (+20%)
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Spot position value: $72,000 (up $12,000)
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Short position loss: -$12,000
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Net portfolio value: $60,000
In both scenarios, your total portfolio value remains at $60,000. This is what traders call being “Delta Neutral”—your portfolio becomes relatively insensitive to price movements in either direction.
Important consideration: While this neutralizes directional price risk, it also means you won’t benefit from price appreciation while the hedge is active. The strategy is designed for capital preservation during periods of uncertainty, not for capturing upside.
3. Step-by-Step: Setting Up on YEX
Here’s how the basic setup process works on YEX Futures:
Step 1: Transfer Collateral
Move the appropriate collateral to your Futures wallet. This could be USDT for perpetual contracts or USD for coin-margined contracts (if available). Coin-margined contracts can be more capital-efficient as they allow you to use the asset you’re hedging as collateral.
Step 2: Select Margin Mode
Navigate to the perpetual contract you want to trade (e.g., BTC/USDT Perpetual). For this specific strategy, Isolated Margin is typically recommended because it keeps your hedge position segregated from other trading activities.
Why Isolated? It limits risk to only the collateral allocated to this specific position. If something unexpected happens, it won’t affect your entire account balance.
Step 3: Set Leverage to 1x
The entire purpose of this approach is risk management and capital preservation.
Locate the leverage slider and set it to 1x. Using higher leverage defeats the protective purpose of the hedge and dramatically increases liquidation risk.
Step 4: Execute the Short Position
Position Sizing: Match your spot holdings. If you hold 1 BTC worth $60,000, you would short $60,000 worth of BTC.
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Market orders execute immediately but typically pay higher “taker” fees (around 0.05%)
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Limit orders may qualify for lower “maker” fees or even rebates (around 0.01-0.02%)
Since hedging is typically not time-sensitive, consider using a limit order placed near the current market price to potentially reduce execution costs.
Once filled, your position is established. Your portfolio value is now theoretically locked at the entry point, regardless of subsequent price movements.
Understanding Funding Rates
Perpetual futures differ from traditional futures because they don’t expire. To keep the futures price aligned with the spot price, exchanges use a “funding rate” mechanism where longs and shorts pay each other every 8 hours.
How it works:
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When futures trade above spot (bullish sentiment): Longs pay Shorts
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When futures trade below spot (bearish sentiment): Shorts pay Longs
Bear Market Scenario (Negative Funding)
During bearish periods, funding rates often turn negative, meaning short holders pay long holders.
Example:
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Funding rate: -0.01% per 8 hours
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Your position: $60,000
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Cost per 8-hour period: approximately $6
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Potential annualized cost: roughly -10% APR
This represents the “cost” of maintaining downside protection. Historical data suggests that sustained negative funding in bear markets typically ranges from -1% to -5% annually, with brief spikes during extreme events.
Bull Market Scenario (Positive Funding)
During bullish periods, funding rates typically turn positive, meaning long holders pay short holders.
Example:
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Funding rate: +0.01% per 8 hours
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Your position: $60,000
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Income per 8-hour period: approximately $6
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Potential annualized yield: roughly +10% APR
In this scenario, you receive payments while maintaining your hedge. This is sometimes called “funding arbitrage” or “cash and carry” trading.
Key point: Funding rates fluctuate constantly based on market sentiment and can vary significantly across different market conditions.
Risk Considerations
While this strategy aims to neutralize directional price risk, it introduces other considerations:
Liquidation Risk
Even at 1x leverage, liquidation is theoretically possible if:
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Price moves extremely against your short position (e.g., a 100%+ rally)
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Funding payments gradually erode your collateral over extended periods
Risk management approach: Maintain a collateral buffer above the minimum requirement and monitor your margin ratio regularly.
Opportunity Cost
This is perhaps the most significant trade-off. If the market rallies significantly while you’re hedged, your spot gains are offset by short losses. Your portfolio remains flat while unhedged positions would appreciate.
Timing consideration: This strategy is typically used as a temporary defensive measure, not a permanent position. Traders generally close hedges when they believe market conditions have improved.
Exchange and Counterparty Risk
Your positions exist on the exchange. Consider the platform’s security, reputation, and regulatory standing when deciding where to execute this strategy.
Tax Implications
Tax treatment of hedging strategies varies significantly by jurisdiction. In some regions, opening a short position against a long holding may be treated as a taxable event under “constructive sale” rules. Always consult with a qualified tax professional before implementing any hedging strategy.
Conclusion
Hedging with perpetual futures represents an alternative approach to managing crypto portfolio volatility. By opening a 1x Short position on YEX Futures against spot holdings, traders can theoretically neutralize directional price risk without selling their underlying assets.
Disclaimer:
This article is for informational purposes only. Futures trading carries substantial risk and may not be suitable for all investors.
Trading crypto futures involves substantial risk of loss. You should carefully consider whether such trading is suitable for you in light of your financial condition and ability to bear financial risks. Past performance is not indicative of future results.