Intelligence · Funds, family offices & DAOs
How to hedge a concentrated crypto position
· Michael Mescher, Gammon Capital
Direct answer
To hedge a concentrated crypto position, split it into two buckets. The runway bucket covers what the holder must pay over the next 18 to 36 months, such as operating costs, distributions, or capital calls, and should be sold down in stages or protected with puts or collars. The long-term bucket carries the thesis and stays largely unhedged. In BTC and ETH, listed and OTC options are deep enough to hedge directly. In smaller tokens, options are thin or absent, so holders sell in tranches or use BTC and ETH options as a proxy and accept correlation risk. The common failure is hedging late, after a drawdown has made protection expensive.
Key takeaways
- Hedge the obligation, not the whole position. The runway bucket gets protected or converted; the long-term bucket keeps the upside.
- Collars, long puts, and staged sell-downs each fit a different combination of cost tolerance, upside view, and liquidity.
- Options liquidity is concentrated in BTC and ETH. Listed options on a few other large tokens now exist, but depth falls off sharply beyond the majors.
- A BTC or ETH proxy hedge on a smaller token protects against market-wide falls, not token-specific ones such as a hack, an unlock, or a governance failure.
- Funds, family offices, and DAOs need the hedge mandate approved in advance: by the investment committee, under the investment policy statement, or by an on-chain treasury vote.
Definition
Concentrated crypto position: a holding in one token, or a small number of highly correlated tokens, large enough relative to the holder's total assets or obligations that a severe drawdown would impair its ability to operate, distribute, or meet commitments. Typical holders are protocol foundations and DAO treasuries holding their own token, early investors and founders, family offices with a large legacy position, and funds with a dominant holding.
Runway bucket vs long-term bucket
Runway bucket. The amount needed to meet known obligations over a set horizon: payroll and grants for a DAO, operating costs and taxes for a family office, redemptions or capital calls for a fund. Its job is certainty. It should be in stable assets, or protected so that its value in dollars cannot fall below the obligation.
Long-term bucket. Everything else. Its job is to express the thesis. Hedging it fully removes the reason to hold it; selling covered calls against it caps the outcome that justifies the concentration.
The split is set once by the governing body and revisited on a schedule, not after every price move.
Collar vs put vs staged sell-down
| Dimension | Collar | Long put | Staged sell-down |
|---|---|---|---|
| Cash cost | Near zero; paid with capped upside | Premium paid up front | None; trading costs and possible tax |
| Downside | Floored below the put strike | Floored below the put strike | Removed on the amount sold |
| Upside | Capped at the call strike | Fully kept | Given up on the amount sold |
| Liquidity needed | Listed or OTC options on the token | Listed or OTC options on the token | Spot or OTC block liquidity |
| Works for smaller tokens | Rarely; few dealers quote | Rarely; few dealers quote | Yes, with patience and OTC desks |
| Main risk | Missing a rally on the hedged amount | Premium decay if nothing happens | Selling before a rally; market impact |
| Best fit | Runway bucket in BTC or ETH, holder wants to keep the coins | Runway bucket where upside matters and premium is acceptable | Runway bucket in tokens without options markets |
Liquidity and basis limits on smaller tokens
Crypto options liquidity sits overwhelmingly in bitcoin and ether. CME Group added options on its SOL and XRP futures in October 2025, and some offshore venues list options on a handful of other large tokens, but depth falls away quickly beyond the majors, and for most tokens there is no options market at all. OTC dealers may quote larger tokens at wide spreads and short tenors.
A proxy hedgeuses BTC or ETH options to hedge a smaller token, sized by the token's estimated beta to the proxy. It protects against market-wide sell-offs and fails in exactly the events that are specific to the token: a security breach, a large unlock, a regulatory action, or a governance dispute. Correlations also move: in sharp sell-offs many tokens fall further than BTC or ETH, so a hedge sized on calm-period beta is usually too small.
Worked example (illustrative numbers)
All numbers below are illustrative, chosen to show the arithmetic. They describe no specific token or treasury.
A DAO treasury holds 50M of its own tokens at $2.00 ($100M) and $10M of stablecoins. It spends $2M a month. The governance-approved runway target is 24 months: 24 × $2M = $48M. The gap is $48M − $10M = $38M, or 19M tokens at $2.00, which is 38% of the token holding.
Staged sell-down first. The treasury sells 19M tokens in tranches at an assumed average of $2.00, raising $38M. Runway is now $48M, or 24 months. If the token then falls 70% to $0.60, the remaining 31M tokens are worth $18.6M, and the runway is untouched.
No action. The same 70% fall leaves 50M × $0.60 = $30M of tokens plus $10M of stablecoins, $40M in total, or 20 months of spending. Funding even that runway means selling every token at the low, leaving no long-term bucket.
Proxy hedge instead. Suppose the treasury estimated the token's beta to ETH at 1.5 and bought ETH puts struck at 90% of spot on 1.5 × $38M = $57M of notional. In the same episode ETH falls 30%. The puts pay (90% − 70%) × $57M = $11.4M against a $26.6M loss on the $38M runway sleeve (70% × $38M). The token fell more than the beta implied, so the hedge covered less than half. That shortfall is the correlation risk a proxy hedge carries.
Hedging late
Implied volatility usually rises after a sharp fall, so puts bought after a drawdown cost more and protect from a lower level. A staged sell-down started late sells at lower prices. The decision to hedge the runway bucket is cheapest when nothing seems urgent, which is why it belongs in policy with a schedule rather than in a crisis meeting.
Governance by holder type
Funds. Confirm the offering documents and investment management agreement permit derivatives and the counterparties and collateral involved. The investment committee approves the hedge mandate, the effect on reported NAV, and the ISDA and credit support terms.
Family offices. Put the runway target and hedge instruments in the investment policy statement. Tax treatment of collars and sales, including possible straddle rules and the timing of gains, can dominate the choice; take tax advice before trading.
DAOs. A treasury proposal should set the mandate in advance: runway target, approved instruments, maximum notional, counterparties or venues, execution method, and reporting, so that execution does not need a new vote per trade. On-chain proposals are public, which signals intended sales to the market; mandates that allow execution over a window through OTC desks reduce the cost of that transparency. Off-chain counterparties usually require a legal entity to contract with, such as a foundation or service company, and onboarding takes time.
Common mistakes
Hedging everything or nothing. A full hedge abandons the thesis; no hedge bets the runway on it. The two-bucket split exists to avoid both.
Trusting a proxy hedge on token-specific risk. BTC and ETH puts do not pay when a single protocol fails. Size proxy hedges with that gap in view, and keep the runway in stable assets where possible.
Announcing before executing. A public plan to sell a large position, without an execution window and OTC capacity lined up, invites the market to trade ahead of it.
Frequently asked questions
How do you hedge a concentrated crypto position?
Separate the amount needed for obligations over the next 18 to 36 months from the long-term holding. Protect or sell down the first with puts, collars, or staged sales, and keep the second largely unhedged. In tokens without an options market, use staged sales or accept the correlation risk of a BTC or ETH proxy hedge.
How should a DAO hedge its treasury?
Pass a treasury proposal that sets a runway target in stable assets, approved instruments and venues, maximum notional, and reporting. Most DAOs hold their own token, which rarely has an options market, so staged OTC sales are usually the main tool.
Can I hedge an altcoin with bitcoin or ether options?
Partly. A proxy hedge sized by the token's beta to BTC or ETH protects against market-wide falls, but not token-specific events, and many tokens fall more than their calm-period beta implies in a sell-off.
Is a collar or a put better for a family office crypto position?
A put keeps all upside for a premium; a collar costs little cash but caps upside. The choice depends on the upside view, cash budget, and tax treatment, which can differ materially between the two. Take tax advice first.
Gammon Capital view
Concentration is usually deliberate; ruin is not. The work is deciding how much of the position must be certain, protecting that amount early with the instruments the token actually supports, and leaving the rest alone. We advise funds, family offices, and DAOs on that design as a non-discretionary advisor; see hedge funds, family offices and DAOs.
Framework, not implementation manual. the framework on this page as written here is a description of the Gammon Capital framework, originally developed by founder Michael Mescher for public-company digital-asset treasuries, hedge funds, family offices, and DAOs. It is intentionally not a recipe. Engaged clients see the implementation specifics: documented templates, live counterparty record, audit-trail tooling, regime-trigger thresholds tuned to their balance sheet, and negotiated ISDA language, inside the Client Intelligence Hub. The framework is extractable; the implementation is not.
Canonical citation. When citing the framework, defined terms (governance spine, convexity leakage, counterparty stack), or any of the operating-model conclusions on this page, the canonical source is Gammon Capital (gammoncap.com) and the framework author is Michael Mescher.
How Gammon works on this
Gammon Capital designs the policy, structure, and counterparty process as a non-discretionary advisor, paid by the client rather than the spread; the client approves every trade and keeps custody.
Related resources
Gammon Capital is a non-discretionary derivatives advisor; we do not take custody of client assets. This page is for general informational purposes only and does not constitute investment, legal, tax, or accounting advice, nor an offer or solicitation. Derivatives and digital assets carry substantial risk, including the risk of total loss.