How to Hedge Your NFT Collection With Ethereum Derivatives

Source: Adobe/Pavel Ignatov


The majority of the non-fungible token (NFT) market resides on Ethereum (ETH), tying the efficiency of the NFT market – to a level – to the worth of ether as most NFTs are priced in ETH.

Therefore, NFT collectors who’re involved a couple of potential market downturn might hedge the worth of their assortment utilizing Ethereum derivatives.

Read on to find out how to hedge your NFT assortment with futures and choices.

Hedge your NFT portfolio with futures

If you’re involved concerning the NFT hype dying down, which might doubtless lead to a drop within the worth of your NFT assortment, you would hedge your portfolio by promoting Ethereum futures.

Futures are monetary spinoff contracts the place two events agree to trade an asset at a pre-agreed worth at a particular date. The unique thought behind futures contracts is that you would be able to lock in a worth to purchase or promote an asset sooner or later. That approach, you’ll know the way a lot you’ll pay or obtain no matter the place the marketplace for the asset is on the time.

You can commerce ETH futures on quite a few main crypto exchanges or, for those who favor regulated derivatives, on the Chicago Mercantile Exchange (CME). 

If you expect the NFT market to appropriate within the coming six months, however you don’t need to promote any of your NFTs, you would hedge your Ethereum-based NFT portfolio by promoting ETH futures with a six-month maturity.

You can resolve how a lot of your portfolio you need to hedge by calculating the hedge ratio of your portfolio. That approach, you’ll know what number of futures contracts to hedge part of or your complete NFT portfolio.

Hedge your NFT portfolio with choices

Alternatively, you would additionally hedge your NFT assortment utilizing Ethereum choices.

Options are derivatives contracts that give the holder the best however not the duty to purchase or promote an asset at a predefined worth at a particular time sooner or later. That approach, you possibly can defend your self towards a drop within the worth of your portfolio however, not like with futures contracts, you’re solely required to pay for the choice (and never purchase or promote the underlying asset) on the expiry date.

To hedge your JPEG assortment from a decline in worth within the coming six months, you would purchase Ethereum put choices on crypto derivatives trade like Deribit.

By buying Ethereum put choice contracts, you should buy/promote ETH at a predefined worth at an agreed date. If the market worth of Ethereum’s token drops beneath the choices’ strike worth, your contracts might be “within the cash” and it is possible for you to to buy ETH cheaper out there and promote them for the upper pre-agreed worth (on the strike worth).

That approach, you make a revenue in your put choices hedge, which is able to offset a loss in your NFT assortment.

Before you exit and begin hedging the one that you love NFT assortment with ETH derivatives, take into account that the NFT market and Ethereum aren’t completely correlated. In reality, in accordance to a Coin Metrics report, they aren’t that correlated in any respect.

The report states: 

“[…] There doesn’t seem to be a constant correlation between OpenSea gross sales quantity and ETH worth – at instances they’re extremely correlated, like August 2021, however at different instances they’re negatively correlated, like November 2021. Although it’s nonetheless early, it seems that NFTs are a comparatively unbiased market and will, for essentially the most half, transfer individually from the remainder of the crypto market.”

That means you possibly can hedge towards a drop within the worth of your NFTs to a sure diploma however the likelihood is that Ethereum derivatives – even with a 1-1 hedge ratio – is not going to offset a drop in NFT portfolio worth fully.

Moreover, earlier than you try to hedge your NFT assortment, be sure you absolutely perceive how futures and choices work to be sure you don’t find yourself inadvertently shedding cash. 

Learn extra: 
– 5 NFT Trading Strategies For JPEG Traders
– 88% of Surveyed High-Net-Worth Art Collectors Interested in Buying NFTs

– NFTs in 2022: From Word of the Year to Mainstream Adoption & New Use Cases
– When You Buy an NFT, You Don’t Completely Own It – Here’s Why

– NFT Rental Has Major Growth Potential as ‘Airbnb of the Metaverse’ – Analysts
– NFT Minting is Increasingly Competitive, But One in Three NFTs End Up Dead – Nansen

– Fractional NFTs Might Democratize Digital Investing
– How Music NFTs Could Disrupt the Music Industry

– Top 20 NFT Marketplaces Where You Can Buy & Sell Digital Collectibles
– Evaluating NFTs: How to Know Whether an NFT Project is Legit

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About the Author: Daniel