Hedging with automatic liquidation and leverage selection on bitcoin futures

Bitcoin derivatives positions are maintained with a self-selected margin, which is often too low to avoid automatic liquidation by the exchange, without notice, especially during periods of excessive volatility. Indeed, according CryptoQuant, almost $80 billion on centralised exchanges were liquidated 2021, that an average over $200 million per day. So hedgers bitcoin price risk should account for possibility when taking futures. We derive semi-closed form optimal hedging strategy dual objectives – minimize both variance hedged portfolio and probability due insufficient collateral. The solution depends statistical characteristics spot futures extreme returns, other parameters characterize hedger choice leverage, loss aversion collateral management. An empirical analysis based minute-level data compares performance major direct inverse instruments traded five exchanges.