BitMEX founder Arthur Hayes: Seven trading strategies for NFTs, you can even use them for contracts

The former leader of the Bitcoin derivatives exchange BitMEX, co-founder Arthur Hayes, continues to share insightful trend perspectives on his Medium. In late August, he published an article related to NFTs, primarily focusing on the development of NFTs as a form of community identity and symbolism. In September, he further described the common trading strategies in the current NFT market. Summarizing the key points of the articles can help in understanding the market overview.

Seven Basic Trading Strategies

Arthur Hayes stated that the NFT market differs from traditional galleries as it leverages social media to increase value or is released through well-known NFT markets. After the release of a piece, it can be freely traded, leading to rapid and significant price increases, which are common stories among collectors.

There are seven main NFT trading strategies:

1. Mint to Flip

Arthur Hayes observed that the market norm is to provide an initial mint price for NFTs ranging from 0.01 to 0.1 ETH. It is crucial to be able to quickly buy the first minted NFTs by closely monitoring social platforms and chat rooms.

In this type of strategy, collectors usually hold the NFT for only a few hours or days and aim to quickly sell at the floor price of the project in the secondary market to make a profit.

Since the initial investment cost is very low, it is relatively easy to make a profit. Encountering projects like CryptoPunks, Bored Ape Yacht Club, or Pudgy Penguin could potentially yield high profits in the short term.

2. Finding Value through Rarity

Arthur Hayes recommends Rarity.tools, where individuals can identify which NFTs in a project are more popular than others based on objective rarity characteristics to determine their value. It is also possible to find NFTs with rare features but lower prices.

He mentioned that it is best to hedge against the project's floor price if possible. Otherwise, there is a risk that a rare feature may not be recognized by the market due to certain factors.

3. Fractional Sales

Arthur Hayes described this method as the recent fragmented sales of dog meme art by PleasrDAO. Through Fractional.art, high-priced NFTs can be packaged into smart contracts, split into numerous small equity units, and traded on the market. This approach can further increase the overall value of the NFT.

4. Influencing Others

The power of community influencers can sway the market, and this holds true in the NFT field as well. Arthur Hayes refers to them as "taste makers" who showcase their collections publicly, discuss why they resonate with a piece, or explain why it will become popular.

In this context, the simplest strategy is to purchase NFTs discussed by renowned NFT opinion leaders at the lowest market price. This method does not require lightning-fast execution.

Another long-term strategy is to build relationships with opinion leaders and discuss the NFT projects you invest in. Once they show interest or acquire them, sharing relevant information can be beneficial for your investments.

5. NFT Derivatives

Arthur Hayes mentioned another method of offering derivatives for the most popular NFT projects. This hybrid centralized and decentralized financial design can create unprecedented ways to trade, hedge, and speculate on digital artwork.

He believes that setting a market floor price for derivatives initially makes sense, allowing traders to hedge and speculate.

6. CEX Market Floor Price Derivatives

Arthur Hayes discussed more advanced designs here. He pointed out that derivatives are easily created in centralized exchanges (CEX) using synthetic concepts. For example, perpetual contracts with CryptoPunk's market floor price collateralized by ETH.

The index price interacts with smart contracts, tracking the CryptoPunk project's market floor price; the mark price is the current trading price. The funding rate is obtained from the standard deviation between the index and mark prices. To create NFT market floor prices and hedge short perpetual contracts, market makers are motivated to directly buy NFTs at the market floor price.

Arthur Hayes stated that although NFTs themselves cannot be used as collateral, perpetual contracts settled with cash collateral are easily achievable on any centralized exchange. Physical delivery can be handled by DeFi or decentralized exchanges (DEX).

7. DEX Market Floor Price Derivatives

Arthur Hayes also discussed the application of market floor price derivatives in the context of decentralized exchanges (DEX). He mentioned splitting into two parts: one where users collateralize NFTs to borrow ETH in a protocol where NFT-secured ETH is called nETH; users pay interest and need over-collateralization. Your NFT's market floor price needs to be higher than the ETH you can borrow. If the market floor price drops, borrowers of ETH must pay additional ETH to avoid liquidation.

Another part involves creating decentralized perpetual contracts where ETH and nETH can be used as collateral together. Market makers for short perpetual contracts can use nETH to pay position fees, while speculators for long positions can simply use ETH as leverage collateral.

Do Not Overlook the NFT Market

Arthur Hayes believes that one should not overlook the enormous trading volume and unique trading opportunities in the NFT market just because of naysayers. He suggests that people should not view themselves as trading image files but rather enjoy it as they would trading stocks.

He thinks that NFTs are no different from any other asset that humans continuously buy and sell. Instead of trading with high fees in traditional galleries, he recommends trading NFTs from the comfort of home, paying only low network fees.