Finova Capital Highlights the Importance of Hedging and Risk Management in Digital Assets: Yes, It's a Real Thing

Written by Yoav More, Managing Partner at Finova Capital, a hedge fund specializing in digital assets, cryptocurrencies, and blockchain investments

2024 has been a banner year for the digital asset (crypto) market. From regulatory milestones to a prominent role in the U.S. presidential race and solid gains across the board, investor confidence has made a strong comeback in a sector that, just two years ago, was reeling from scandals and high-profile collapses.

One of the most practical indicators of this market's evolution is its growing integration into traditional capital markets. And no, we're not just talking about the launch of Bitcoin and Ethereum ETFs.

Today, more than ever, investors have access to various financial instruments that enable sophisticated participation in the crypto space, including the ability to manage risk through hedging. These tools operate within familiar financial infrastructure without requiring direct ownership of digital assets. A recent example is the SEC's approval of ProShares' XRP futures ETFs - an important milestone, but just one piece of a broader trend.

Hedging, in a Nutshell

Think of hedging as putting a fence around your investment. It's a way to limit downside risk at a relatively low cost. Traditionally, hedging has been the domain of institutional players, hedge funds, and experienced investors.

In the crypto space, the need for hedging is especially clear. The core investment thesis is often long-term ("long-only"), and while the sector has posted phenomenal gains over time, those returns have come with substantial volatility. Bitcoin's 12-month volatility currently sits above 35%, compared to multi-year averages of 15% for the S&P 500 and 24% for the Nasdaq-100. In this context, hedging offers breathing room and makes investing in digital assets over shorter or medium-term horizons possible without shouldering excessive risk.

How Can Crypto Be Hedged?

Not long ago, hedging crypto exposure was difficult, especially when compared to the traditional financial world. But that's changed. Today, several instruments - tradable in public markets - offer efficient ways to hedge digital assets.

Short ETFs

Even before spot crypto ETFs arrived, short crypto ETFs were already in play. Alongside direct short exposure to digital currencies, inverse and leveraged ETFs emerged to track companies whose stock performance is tied to crypto prices. The most prominent example is MicroStrategy (MSTR), often seen as a leveraged proxy for Bitcoin. These products let investors hedge or benefit from downturns without fully exiting the market. However, many of these instruments - particularly leveraged inverse ETFs - can suffer from tracking discrepancy and substantial under performance over time.

Yoav More, Managing Partner at Finova Capital

Options

Options are among the most classic hedging tools, offering flexible strategies for risk management. While you can't yet trade options directly on digital assets in traditional markets, investors can trade options on crypto-related ETFs or companies such as MSTR, Coinbase (COIN), Riot Platforms (RIOT), and Marathon Digital (MARA), all of which are exposed to crypto through mining, trading, or direct holdings.

Because of the sector's high volatility, these options are often priced at a premium. To use them effectively, investors should focus on short-term expirations and more advanced strategies.

Futures

Like options, futures are traditional instruments for hedging and leveraged exposure. They allow investors to short the underlying asset and use only partial collateral to gain full market exposure.

The CME (Chicago Mercantile Exchange) has expanded its crypto futures lineup to include standard contracts for Bitcoin and Ethereum, micro-futures suitable for retail investors, and rolling futures that have become especially popular with institutions. Still, futures come with a cost: crypto futures often have high rollover expenses, that can exceed 10% annually, making disciplined execution a must.

The Bottom Line: Just One More Piece of the Puzzle

The ability to hedge crypto investments is no longer theoretical - it's increasingly practical. More importantly, the growing availability of traditional financial instruments like options, futures, and ETFs in crypto is a clear signal of the market's maturation.

As the infrastructure supporting these tools continues to expand, institutional and retail investors alike are likely to enter the space more confidently, armed with the ability to manage risk more effectively and invest more intelligently.

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This article is for informational purposes only and not intended to be investing advice. Any mention of specific securities, products, or investments should not be construed as an endorsement or recommendation. Readers are encouraged to conduct their research and due diligence before making investment decisions.

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