Why Hedge Crypto Holdings?

If you hold crypto assets like ETH, BTC, or stablecoins earning yield in DeFi protocols, you're exposed to price volatility. A 30% drop in ETH can wipe out months of yield. Hedging with perpetual futures allows you to:

Eliminate directional risk — Your portfolio value stays stable regardless of price movements
Earn yield without price exposure — DeFi lending/staking APY becomes your net return
Capture funding rate arbitrage — Sometimes you get paid to hold the hedge
Maintain full custody — Unlike selling to stablecoins, you keep your assets on-chain

Hyperliquid is the leading on-chain perpetual DEX with deep liquidity, fast execution, and competitive funding rates. It's the hedge venue of choice for delta-neutral strategies.

What Are Perpetual Futures?

Perpetual futures (perps) are derivative contracts that track the price of an underlying asset without an expiration date. Unlike traditional futures:

Key Characteristics

No expiration — Hold positions indefinitely
Funding rate mechanism — Periodic payments between longs and shorts to keep price anchored to spot
Leverage — Trade with up to 50x leverage on Hyperliquid (use 1-5x for hedging)
Instant settlement — Open/close positions in seconds
Deep liquidity — Hyperliquid has $500M+ daily volume on ETH-PERP

When you short ETH-PERP, you profit when ETH price falls and lose when it rises — the opposite of holding spot ETH. This inverse relationship is what creates the hedge.

Understanding Funding Rates

Funding rates are the core mechanism that keeps perp prices aligned with spot markets. Every 8 hours, traders on one side pay traders on the other side:

Positive Funding

Market is bullish. Longs pay shorts.

As a short hedger: You receive payments from long traders. This boosts your net APY.

Negative Funding

Market is bearish. Shorts pay longs.

As a short hedger: You pay long traders. This reduces your net APY.

Formula:

Funding Payment = Position Size × Funding Rate

Example: $10,000 ETH short × 0.01% funding = $1 payment every 8 hours

Hyperliquid typically has funding rates between -0.01% to +0.03% per 8-hour period. Over a year, positive funding can add 5-15% APY to your returns.

Step-by-Step: Opening a Short Hedge on Hyperliquid

Step 1: Calculate Your Hedge Size

Your short position should equal the notional value of your long exposure.

Example: You have 10 ETH ($30,000 at $3,000/ETH) deposited in Aave earning 4% APY.

Short Size = 10 ETH = $30,000 notional

💡 Pro tip: Start with 1x hedge ratio (no leverage). Advanced users can use 1.1-1.2x to account for funding costs.

Step 2: Fund Your Hyperliquid Account

Transfer USDC to Hyperliquid L1 (Arbitrum-based chain):

Bridge USDC from Arbitrum to Hyperliquid using the official bridge
Or deposit directly from CEXs that support Hyperliquid withdrawals
Maintain 20-30% collateral buffer for safety

For $30,000 hedge: Deposit $8,000-10,000 USDC as collateral (using 3-4x leverage)

Step 3: Open the Short Position

Go to app.hyperliquid.xyz
Connect your wallet (MetaMask, Rabby, etc.)
Select ETH-PERP market
Switch to Short side
Enter size: 10 ETH
Set leverage: 3x (conservative)
Order type: Market for instant execution
Review liquidation price (should be 50%+ above current price)
Click Short

⚠️ Double-check: Size matches your long position. Higher leverage = higher liquidation risk.

Step 4: Monitor Your Hedge

Track these metrics daily:

Margin ratio — Keep above 50% to avoid liquidation
Funding rate — Positive = you earn, negative = you pay
PnL — Should be near $0 if hedge is balanced
Long position size — Rebalance if it drifts (e.g., from borrowed assets)

Risk Management Best Practices

1. Liquidation Protection

Your short position gets liquidated if the price rises too much relative to your collateral.

Liquidation Price Formula:

Liq Price = Entry Price × (1 + 1/Leverage)

Example: Short ETH at $3,000 with 3x leverage → Liquidation at ~$4,000

Safety tip: Use 2-4x leverage max. Add collateral if margin ratio drops below 60%.

2. Funding Rate Monitoring

If funding rates turn persistently negative (shorts pay longs), your hedge costs increase.

Track 7-day average funding rate on Hyperliquid
If funding < -0.02% for extended periods, consider reducing hedge or switching to different asset
Use Hedgeway to automatically optimize for positive funding

3. Rebalancing

Over time, your long and short positions may drift due to:

Interest accrual on borrowed assets (if using leverage loops)
Yield compounding on your long position
Funding payments adjusting your short PnL

Rebalance trigger: When delta exposure exceeds 5-10% of position size. Adjust short size to match current long notional value.

4. Gas & Fee Optimization

Costs erode net APY:

Hyperliquid trading fees: 0.02% maker, 0.05% taker (use limit orders to save)
Bridge fees: ~$2-5 to move USDC to Hyperliquid
Rebalancing frequency: Monthly vs daily can save 2-3% APY

💡 Pro tip: Automated protocols like Hedgeway batch rebalances and use gas-efficient strategies to minimize costs.

Example: Hedging an Aave Position

Scenario

You have $50,000 USDC and want to earn yield on ETH without price risk.

STEP 1: DEPOSIT TO AAVE

• Deposit $40,000 USDC to Aave V3 on Arbitrum
• Borrow $28,000 WETH (70% LTV)
• Net exposure: $28,000 long ETH
• Earning: ~12% APY (supply + borrow rewards)

STEP 2: HEDGE ON HYPERLIQUID

• Bridge $10,000 USDC to Hyperliquid
• Short $28,000 ETH-PERP (9.3 ETH at $3,000)
• Leverage: 2.8x (conservative)
• Liquidation price: ~$4,070 (+36% buffer)

NET APY CALCULATION

• Aave yield: +12.0% APY
• Funding rate (avg): +8.5% APY
• Trading fees: -0.3% APY
• Gas costs: -0.2% APY
→ Net APY: +20.0% (stable, no price risk)

📊 Result: If ETH drops 30% to $2,100, your Aave position loses $8,400 but your short gains $8,400. Net change: ~$0. You still earned 20% APY.

When to Close Your Hedge

Close or adjust your short position when:

You exit your long position — If you withdraw from Aave, close the corresponding short immediately to avoid directional exposure
Funding turns severely negative — If funding costs exceed your yield for 2+ weeks, the strategy may no longer be profitable
Margin ratio drops dangerously — If approaching liquidation (margin < 40%), either add collateral or reduce position size
Better opportunities emerge — Switch to assets with higher yield or more favorable funding rates
You want directional exposure — If you turn bullish on ETH, you can partially or fully close the hedge (but this reintroduces price risk)

To close: Go to Hyperliquid, select your ETH-PERP position, and click "Close Position" or manually buy back the same size you shorted.

Manual vs Automated Hedging

Manual (DIY)

PROS

• Full control over positions
• No protocol fees
• Learn by doing

CONS

• Time-intensive monitoring
• Manual rebalancing needed
• Easy to make mistakes
• Gas-inefficient

Best for: Experienced traders with time to manage positions daily

Automated (Hedgeway)

PROS

• Set-and-forget automation
• Optimized gas strategies
• Auto-rebalancing
• Multi-strategy optimization
• Emergency recovery system

CONS

• Protocol fees (0.5-1% APY)
• Less manual control

Best for: Investors seeking stable yield without active management

💡 Recommendation: Start with manual hedging on a small position ($1,000-5,000) to understand the mechanics. Once comfortable, scale up or switch to automated protocols for efficiency.

Common Mistakes to Avoid

❌ Using Too Much Leverage

10x+ leverage on your short = liquidation risk during volatile pumps. Stick to 2-5x max.

❌ Forgetting to Rebalance

Your long position grows from yield, but your short stays static. Check monthly and adjust.

❌ Ignoring Funding Costs

Persistently negative funding can turn a +15% APY strategy into +5%. Monitor daily.

❌ Insufficient Collateral Buffer

Keep 30%+ excess collateral on Hyperliquid. Flash crashes can liquidate thin margins.

❌ Not Testing First

Start with $500-1,000 to learn the interface and mechanics before deploying serious capital.

Conclusion

Hedging crypto with Hyperliquid perpetual futures is a powerful tool for eliminating directional price risk while maintaining yield exposure. By pairing DeFi lending/staking with automated short hedges, you can achieve:

Stable returns — 10-25% APY regardless of market conditions
Full self-custody — Assets stay in your wallet
Transparency — All positions and costs are on-chain
Scalability — Works with $1K or $1M

Start small, monitor funding rates closely, maintain healthy collateral buffers, and rebalance monthly. Once mastered, delta-neutral strategies can form the foundation of a sophisticated DeFi yield portfolio.

Ready to Automate Your Delta-Neutral Strategy?

Hedgeway handles hedging, rebalancing, and optimization automatically across 14+ protocols. Deploy in 60 seconds, earn stable yield, keep full custody.

Explore Strategies

How to Hedge Crypto with Hyperliquid Perpetual Futures