What does hedging mean?

Hedging is a way to reduce the risk of holding an asset. This is done by holding assets that are expected to have price moves in the opposite direction. For example, an investor may buy Bitcoin as a hedge against inflation for the US dollar. Another example is an investor holding stocks in both fossil fuel and green energy companies, thereby protecting their profits from advancements in green technology and any new government regulations that arrive in the future.

Hedging can therefore be seen as a form of investor insurance. ‘Hedging your bets’ is a commonly used phrase that conveys the same idea for preparing for all outcomes. This strategy does however devote capital to the opposite direction of where an investor thinks markets may go, so this strategy typically reduces the amount of profit that can be made as one of these hedges will likely go down in price if the other is to rise.

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