Borrowing Against Your NFTs as a Hedge
There are many reasons why you’d want to take a loan out using your NFT as collateral. Maybe you want to use the money on a new NFT mint. Maybe you want to buy the latest memecoin. Maybe you need to pay your rent that month.
But, hey, maybe you don’t need the money for any reason at all. You’re confident in what the NFT project is creating, but maybe that hoodie or video game is months away from being shipped. While the team builds in silence, it might be worthwhile for you to hedge your investment.
Let’s dig in.
HODLing Has a New Meaning
Forget HODL — there is no shame here. We are allowed to have conviction in our investments while still being smart traders.
NFTs are volatile assets!!! There is no hiding that. If I believe in the long-term value of a project, it might be worthwhile for me to take out “insurance” to protect against short term price risk. Nobody wants to sit there twiddling their thumbs waiting for the next big announcement to pump the collection back up.
TLDR: You can get almost all the upside gain while limiting your downside risk by taking out a loan on your NFT. Hundreds of people are doing this today — not because they love loans, but because they maintain the upside if the Floor Price goes up while locking in the amount they borrowed as the worst case scenario.
How Can I Save Money?
In the example below, you have 1 CryptoPunk with a Floor Price of 50 ETH. You take out a fairly competitive loan at 40 ETH and you will end up paying 2 ETH in interest across a 30 day loan.
Within the 30 days loan period, one of three things will happen:
- The CryptoPunk floor tanks. If the value falls below the amount you borrowed, congrats, you just saved yourself some ETH.
- The CryptoPunk floor moons past 52 ETH. If the value increases more than the interest you owe, congrats again! You’ll still be up on your investment without having to sweat short-term price volatility.
- The CryptoPunk floor is steady. You took out insurance, but unfortunately didn’t really need it.
Borrow Responsibly
Why does any of this matter, you ask? Just this past week, the Bored Ape Yacht Club Floor Price went from 45 ETH to 38 ETH and many wallets found loans that allowed them to hedge their position. Don’t catch those falling knives, anon.
