How to Hedge Your NFT Collection During a NFT Market Crash
In the recent past, NFTs were hitting their absolute peak and the NFT market was in a frenzy with everyone looking for a piece of this exciting space within decentralized finance. PUNKs and BAYC led the charge, accompanied by celebrity-backed projects from figures like Gary Vaynerchuk and Paris Hilton, each release promising not just digital ownership, but also the potential for significant returns, community engagement, and various utilities.
In this article, we take a look at the NFT market crash and how to hedge your NFT collection to protect its value.
The NFT Market Crash of 2022
It’s been a little more than a year since the NFT market crash that started rearing its head in April 2022. The peak was in and it wasn’t long until you saw even the strongest blue chips losing traction. Just for reference, Bored Ape #8817 was sold in July 2022 at a record $3.4M and as of October 2023, the best offer on OpenSea stands just slightly over $195k.
The NFT crash affected all projects and marketplaces. Trading volume, even on the most popular marketplace, OpenSea, declined drastically. From its high in January 2022 of $4.87 billion (1.6M ETH), monthly volume has settled to just $106 million in August (according to Dune Analytics).
While a decline in enthusiasm may seem like the obvious culprit for the downturn in the NFT market, it was merely one piece of a more complex puzzle. The contraction was not solely due to a waning of hype but was also accelerated by a confluence of factors. These included instances of wash trading/airdrop farming within the NFT space, which artificially inflated asset prices, a strong correlation with the broader cryptocurrency market trends that exposed NFTs to wider market volatilities, and an array of macroeconomic conditions that affected liquidity and investor sentiment. Such elements combined to create a perfect storm that led to the puncturing of what many perceived as an NFT bubble.
How to Protect The Value of Your NFTs During a NFT Crash
Observing the declining floor prices of preferred NFT collections can be disconcerting, particularly when it impacts the value of one’s investment portfolio. In such a market downturn, liquidating NFT assets with the intention of repurchasing them at a later stage becomes challenging due to a lack of willing buyers. Moreover, the necessity to factor in the additional costs, such as the 7.5% in fees and royalties required by platforms like OpenSea, further complicates any potential sale. Investors are thus faced with the critical question: what are the next steps in navigating this volatile market?
Hedging Your NFTs Using Perpetual Futures on nftperp
There will be times when you believe that an NFT collection is overvalued or that it will lose its value in the short term. Naturally, you don’t want to be stuck in a position where you’re simply holding a NFT unable to move it based on market conditions. In the past, more experienced traders would have hedged their NFT portfolio with ether futures contracts. But now there’s another way thanks to our platform nftperp that allows traders to long or short blue chip NFT projects and capitalize on the volatility in the market.
nftperp is a perpetual futures exchange that tracks the floor price of NFT collections like CryptoPunk, Milady, and more. Utilizing a constant liquidity AMM with a decentralized limit order book called Fusion AMM, anyone is allowed to be a maker on the protocol with a direct counterparty. This means that traders are automatically able to place bets on the floor price of most NFT projects.
So let’s say for example, that you own an ape with a past floor price of 100ETH. But understanding that the NFT market crash might be sooner than later, you wanted to hedge your downside risk without parting ways with your Ape. With nftperp, you can open a short position on BAYC and if the floor price went to 90ETH, your Ape would be worth that now but you can also close your short position with a profit of 10ETH! Conversely, if the floor price increased instead to 110ETH, although you would have lost 10ETH on your short trade, the value of your Ape would make up for that.
Pretty sweet way to protect the value of your wallet right? Here’s a quick tutorial of our platform.
How to Short an NFT:
- Start on nftperp’s trading page and connect your Metamask in the top right-hand corner. Then, ‘allow’ nftperp to connect to your wallet, and you will be ready to go.
- Now that your wallet is connected, you can select which NFT collection you want to trade. Select the button shown below and choose a collection from the available options.
- Now that you have chosen the collection you want to trade, it is time to determine whether you wish to go short or long, the amount of the NFT collection you would like to trade, and the leverage you would like to take.
Enter the values you wish and use the slider to determine your leverage. Press “Open Position,” and your trade will be opened!
- Now that your trade is opened, you will see details like the Mark Price, Index Price, 24h Volume, funding rates, and the assets market cap.
You can also find data on your current positions, trading history, and funding payments at the bottom.
The downturn in the NFT market has undoubtedly been challenging for many investors, yet it is not indicative of the demise of NFTs or decentralized finance. Rather, this period could be considered a recalibration, a momentary pause that is inspiring innovation and resilience within the community. Amidst the downturn, NFT finance is emerging, signaling fresh growth and dynamism in the space. This evolution is carving out new pathways for engagement with NFTs that extend beyond the simplistic ‘buy and hold’ strategy associated with digital artwork.