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Time to Rethink Crypto Hedging

Derivatives

Written by Adam Morgan McCarthy , Thomas Probst

28/10/2025

    Following recent market shocks, we’re examining hedging practices in crypto markets. Perps dominate trading volume, dwarfing options, but is it time for regime change and could options be the answer? The October 10 crash reminded us how extreme crypto’s volatility can be, and how current hedging tools are limited due to the relatively small size of the market.

    Time to Rethink Crypto Hedging
    by Adam Morgan McCarthy AND thOMAS PROBST

    This week’s report examines current hedging strategies, how perps are used and why options could see more uptake in the aftermath of the worst liquidation event on record.

    Unsurprisingly, funding rates dropped below zero during the October 10 crash, indicating strong demand for short positions. We can also note that the Bybit hack event caused the funding rate to rise. This can be explained by a sudden decline in liquidity and a concentration of long positions.

    Funding rates often tell a story of market phases. When rates remain elevated for prolonged periods of time, this typically signals high conviction, and likely abundant leverage in the market. Crypto perps typically offer massive leverage, often as high as 100x. So when funding rates are elevated and prices are higher, some traders are likely over their skis.

    This was the case on October 10. Traders were overleveraged, and when President Trump’s tariff threats spooked markets, things began to unravel. The rapid uptick in volatility saw prices whipsaw, leading losses for those on the long and short side. This is par for the course in crypto, and raises the question whether perps are suitably robust hedges.

    Read more on this in our latest Data Debrief now!

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    Data Used In This Analysis

    Our industry-leading crypto research is the direct result of combining our proprietary data with world-class in-house experts. Bringing the very best of Kaiko’s people and crypto data together, we unlock the unique insights that form the basis for our discoveries and analysis. We believe in doing so, our data speaks for itself, helping both our clients and the wider industry get a better understanding of the crypto ecosystem, and the evolving trends and patterns in motion at a regional and global scale.

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