The major fraction of the Non-Fungible token market structure resides on Ethereum (ETH). The performance of NFTs is tied to the collection of Ethereum to a greater degree. It can also be related to the value of ether, as most of the non-fungible tokens are priced in ETH.
NFT collectors are majorly concerned about a conceivable market downturn that can possibly hedge the collection’s worth and its ultimate value by using Ethereum derivatives. Read along to learn new ways to hedge NFT collection with various options in the future.
Hedge your NFT Collection with Futures
It might be possible that you are worried about the hype of NFT going down with time and diminishing potential, ultimately resulting in a drop in your NFT portfolio’s value. This can be curbed easily, and you can hedge your collection by trading Ethereum futures.
Now, what are these futures? They are financial derivative contracts created for two parties to agree to trade with an asset at a predetermined price set for a particular date. The main purpose of futures contracts is to set a price for buying and selling an asset in the near future. You can compare it to how you would buy Ethereum. Strategically, you will learn how much you will be paying or receiving regardless of the market structure for the asset at that time.
Suppose you anticipate that the NFT market will be suitable for investments in the near future and are unwilling to sell your non-fungible tokens. In that case, you can hedge your Ethereum in ETH futures and sell them within a six-month maturity period. Trading with ETH futures is possible on various leading crypto exchanges, or you can go for regulated derivatives featuring on the CME, Chicago Mercantile Exchange.
It is for you to decide the amount of your collection you wish to hedge by estimating the hedge ratio related to your portfolio. Likely, you will learn how many future contracts you need to hedge as a part of your complete NFT collection.
An alternative approach to hedge your NFT collection is with Ethereum options. Options can be defined as the derivative contracts that give the right to the holder, who is not obligated to buy or sell any asset at a predetermined price or time. This protects you from a significant drop in your collection’s value. However, unlike futures contracts, one needs to pay for the option at the expiry date and doesn’t really need to buy or sell the asset.
When your JPEG collection faces a decline in value, you can hedge it in the near six months by buying Ethereum through options placed on crypto derivative trades like Deribit. With Ethereum option contracts, one can buy and sell Ethereum at a predetermined price on a particular accepted date. When the market price of ETH tokens falls below the options’ walkout price, the contracts are expected to be profitable. At those moments, you are allowed to purchase Ethereum at a higher price than originally, or you can sell it at a profit.
This creates a way to make profits while hedging on your put options, which leads to a loss on your NFT portfolio. However, before starting to hedge your NFT collection with Ethereum derivatives, make sure you are well-versed in NFT markets and Ethereum, and keep in mind that they are not correlated. You can surely hedge against a fall of your NFT up to a certain degree. However, the probabilities are to take Ethereum derivatives as a ratio with a 1:1 hedge count, which will result in no value drop from the entire NFT portfolio.
Adding to the exciting NFT collectibles aimed at crypto enthusiasts and hobbyists, the entries received from other fields such as the mainstream, tech, arts, and finance are really enthralling.
Before hedging your NFT collection, make sure you are well versed in the two categories: futures and options, and how they work.