Hedging a spot portfolio with perps

Hedging a spot portfolio with perpetual futures lets you protect your holdings from a price drop without selling them. You open a short perp equal in size to your spot position, so a fall in the market produces a gain on the short that offsets the loss on the spot. Your net exposure sits close to zero for as long as the hedge is open.

It's a strategy used by long-term holders, miners, and institutional investors who want to manage short-term volatility without triggering a sale.

Selling your Bitcoin to avoid a drawdown costs you the position. Hedging with a short perp keeps the Bitcoin and neutralizes the price risk. Bear in mind, the hedge isn't free, since funding rates are a cost, but it's often cheaper than selling and buying back, which can also mean tax events and lost yield.

Hedging means opening a position that moves in the opposite direction to your existing exposure. For example, if you hold 1 BTC in spot and open a 1 BTC short perpetual futures contract, you hold a delta-neutral position. A price move in either direction affects both legs in opposite ways, leaving your net P&L close to zero. For a primer on how perpetual futures contracts work, read our dedicated article what are perpetual futures.

Step 1: Calculate your spot exposure. Work out the notional value of the spot position you want to hedge. If you hold 1 BTC at $60,000, your exposure is $60,000 long.

Step 2: Open a short perp of equivalent notional value. Open a 1 BTC-PERP short on Kraken Pro. Your short position now has a notional value of $60,000, matching your spot exposure.

Step 3: Understand the offset. If BTC falls 10% to $54,000, your spot position loses $6,000. Your short perp gains approximately $6,000. Net P&L is approximately zero. If BTC rises 10% to $66,000, your spot gains $6,000 and your short perp loses approximately $6,000. Net P&L is again approximately zero. The hedge offsets movement in both directions.

BTC example:

• Spot holdings: 1 BTC at $60,000
• Short perp: 1 BTC-PERP at $60,000
• BTC falls to $54,000 (10% drop)
• Spot loss: $6,000
• Short perp gain: ~$6,000
• Net P&L: ~$0 (before funding costs)

ETH example:

• Spot holdings: 10 ETH at $3,000 = $30,000
• Short perp: 10 ETH-PERP at $3,000
• ETH falls to $2,700 (10% drop)
• Spot loss: $3,000
• Short perp gain: ~$3,000
• Net P&L: ~$0 (before funding costs)

Actual outcomes depend on execution price, basis at the time of the trade, and funding rates, so it's important to consider these factors when placing your trades. These examples are illustrative only and not a guarantee.

The short perp leg requires posted collateral, and the amount depends on how leverage is structured in your region. In the EU and other geos outside the US, you select leverage at order entry; up to 10x in the EU, up to 100x on BTC and ETH in other non-US locations. Lower leverage means more collateral posted, but more room before liquidation if the market rallies against your short. In the US, leverage is built into the contract structure based on the collateral you post.

For a hedge specifically, lower leverage on the short leg is usually the safer choice. A high-leverage short can liquidate during a sharp rally, leaving you with the spot position unhedged and a realized loss on the futures leg. The capital efficiency of higher leverage comes at the cost of fragility, which defeats the purpose of a hedge.

When the funding rate is positive, the short perp pays funding to longs at each settlement interval. On Kraken, that's every 8 hours in the US and every hour in the EU and other regions. That payment is the recurring cost of holding the hedge.

At 0.01% per 8-hour period, that's 0.03% per day, or roughly 11% annualized on the hedged notional. On a $60,000 hedge, that's approximately $18 per day at that rate. For EU and rest of the world traders on Kraken, funding settles every hour, the same daily cost is reached at a proportionally lower per-interval rate. Of course, this is an illustrative figure at one specific rate. Actual funding rates change constantly based on market conditions and can be higher, lower, or even negative.

If funding flips negative, the short perp collects rather than pays. But funding rates can spike significantly during periods of high market leverage, making the hedge substantially more expensive to maintain.

The practical question to ask yourself is whether the cost of the hedge is worth the downside protection over the period you plan to hold it. For a full explanation of how funding rates are calculated and what drives them, read our how funding rates work guide.

A full hedge neutralizes all directional exposure. However, a partial hedge reduces it proportionally.

50% hedge example on 1 BTC at $60,000:

• Short 0.5 BTC-PERP at $60,000
• BTC falls 10% to $54,000
• Spot loss: $6,000
• Short perp gain: ~$3,000
• Net loss: ~$3,000 (50% of unhedged loss)
• Funding cost is also halved compared to a full hedge

A 50% hedge halves your directional risk and funding cost, but lets you participate in 50% of any upside move. For accounts where funding costs are a meaningful consideration, a partial hedge can be more practical than going fully delta-neutral.

Basis risk is the risk that the perp price and the spot price don't move identically. Under normal conditions they track closely. During periods of high volatility or forced selling, the perp can trade at a discount to spot.

If the perp trades at a discount during a sell-off, your short gains less than your spot loses, and the hedge underperforms. The gap between perp and spot price is called the basis. It's typically small, but it can widen when markets are under stress and arbitrage is harder to execute quickly.

Basis risk is a real limitation of this strategy. It doesn't make hedging ineffective, but it means the offset is approximate rather than exact. For a full treatment of the spot-futures spread and how traders approach it, check out our basis trading guide.

Hedging a spot position with a short perp is a reasonable strategy in a few specific situations:

1. You expect short-term downside but want to maintain long-term spot ownership. Miners, institutional holders, and long-term investors often fall into this category. Selling spot has tax or strategic consequences, so a hedge is cheaper than selling and re-entering.
2. You hold a large spot position and want to reduce volatility over a specific period, such as before a large planned expenditure or during a period of known market risk.
3. Hedging is less practical for small accounts where the funding cost relative to position size is high, or where the basis risk on less liquid perp contracts is large enough to make the offset unreliable. In those cases, a direct reduction of the spot position may be simpler.

Perpetual futures are derivative contracts that allow you to speculate on the price movement of assets such as BTC, SOL and ETH, without needing to own the actual cryptocurrencies.

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