Author: danny; Source: X, @agintender
With the issuance of new generation cryptocurrencies such as Monad, MMT, and MegaETH, many retail investors participating in the initial offerings face a common challenge: how to secure substantial paper profits?
The general hedging strategy is to open an equivalent short position in the futures market after acquiring the spot, thereby locking in profits. However, this strategy often becomes a “trap” for retail investors with new cryptocurrencies. Due to poor liquidity of new coin contracts and a large amount of chips waiting to be unlocked in the market, “malicious actors” can use high leverage, high financing rates, and precise pump-and-dump tactics to force retail investors' short positions to be liquidated, causing their profits to drop to zero. For retail investors lacking bargaining power and OTC channels, this is almost an unsolvable game.
In the face of the dealer's sniping, retail investors must give up the traditional 100% accurate hedging and instead adopt a diversified, low-leverage defensive strategy: (from a mindset of managing returns to a mindset of managing risks)
Cross-Exchange Hedging: Open a short position in a liquid exchange (as the main locked position), while simultaneously opening a long position in a less liquid exchange (as a liquidation buffer). This “cross-market hedging” greatly increases the cost and difficulty for speculators to target, while also allowing for arbitrage by taking advantage of the funding rate differences between different exchanges.
In the highly volatile environment of new coins, any strategy involving leverage carries risks. The ultimate victory for retail investors lies in adopting multiple defensive measures to transform the risk of liquidation from a “certain event” to a “cost event,” until safely exiting the market.
1. The Real Dilemma of Retail Investors in New Shares - No Hedging, No Profit; Hedging Being Targeted
In actual IPO scenarios, retail investors face two main types of “timing” dilemmas:
- Futures Hedging (Pre-Launch Hedging): Retail investors receive futures tokens or locked share certificates before the market opens, rather than spot assets. At this point, there are already contracts (or IOU certificates) in the market, but the spot assets have not yet circulated.
- Spot Hedging Restrictions (Post-Launch Restrictions): Although the spot has entered the wallet, it cannot be sold immediately and efficiently due to withdrawal/transfer time restrictions, extremely poor liquidity in the spot market, or exchange system congestion.
Let me dig up something for everyone: Back in October 2023, Binance had a similar spot pre-market product available for hedging in the spot market, but it might have been paused due to the need for launchpool or poor data (the first asset at that time was Scroll). This product could have effectively addressed the issue of pre-market hedging, what a pity~
So this market version will appear, the futures hedging strategy - that is, traders expect to receive spot goods and open short positions in the contract market at a price higher than expected to lock in profits.
Remember: the purpose of hedging is to lock in profits, but the key is to manage risks; when necessary, one should sacrifice part of the profits to ensure the safety of the position.
Key points of hedging: only open a short position at high yield prices.
For example, if your ICO price is 0.1 and the current market price is 1, which is a 10x increase, then the cost-effectiveness of “risking” to open a short position is relatively high. First, it locks in a 9x return, and second, the cost for the manipulators to drive the price up further is also relatively high.
However, in practice, many people blindly open short positions for hedging without looking at the opening price (assuming the expected return is 20%, but in fact, there is no real need for this).
The difficulty of pumping from an FDV of 1 billion to 1.5 billion is much greater than that from an FDV of 500 million to 1 billion, although both represent an increase of 500 million in absolute terms.
Then the question arises, because the current market liquidity is poor, even opening a short position may still be targeted. So what should we do?
2. Upgraded Hedging Strategy - Chain Hedge
Apart from the more complex calculations of the asset's beta and alpha and the correlation with other mainstream coins for hedging, I propose a relatively easy-to-understand strategy of “hedging after hedging” (circular hedging?!).
In short, it means adding a long position to a hedge position, that is, when opening a short hedge position, also opportunistically opening a long position to prevent the main short position from facing forced liquidation. It sacrifices a certain amount of profit in exchange for a safety margin.
Note: It cannot 100% solve the liquidation problem, but it can reduce the risk of being targeted by specific exchange manipulators, and it can also utilize funding rates for arbitrage (provided that 1. stop-loss and take-profit points are set correctly; 2. the opening price has a good cost-performance ratio; 3. hedging is a strategy, not a belief, and there is no need to follow it until the end of time).
Where exactly should I open a short position? Where should I open a long position?
3. Rehedging Strategy Based on Liquidity Differences
Core Idea: Using Liquidity Differences for Position Hedging
On exchanges with good liquidity and a more stable pre-market mechanism - open short positions, utilizing its large depth, the market makers need to invest more capital to drive up short orders. This greatly increases the cost of sniping, serving as the main profit lock-in point;
Open a long position on an exchange with poor liquidity and high volatility to hedge against the short position of A. If A is violently pumped, the long position of B will follow the rise, compensating for A's losses. Exchanges with poor liquidity are more likely to experience significant pumps. If the prices of A and B are synchronized, the long position on the B exchange will quickly profit, which can offset any potential losses from the short position on the A exchange.
4. Calculation of the Hedging Strategy
Assuming 10,000 ABC spot. Assuming ABC is worth $1.
- Empty Position: Exchange A ( stable ) $10,000
- Long Position: Exchange B ( has poor liquidity ) $3,300 (for example, ⅓, this value can be inferred from expected returns)
- Spot: 10,000 ABC worth $10,000
Scenario A. Price Surge (Market Maker Pump)
- ABC Spot: Value rises.
- A short position in the exchange: Floating losses increase, but due to good liquidity, the difficulty of liquidation is much higher than in the previous plan.
- B Exchange Long Position: The value surged, compensating for the unrealized losses in A Exchange, making the overall position relatively stable. (Make sure to set appropriate take profit and stop loss levels.)
Scenario B. Price Crash (Market Sell Pressure)
- ABC Spot: Value decreased.
- A short position on the exchange: Floating profit increases.
- B Exchange Long Position: Increased unrealized loss.
Since the short position of $10,000 on Exchange A has a larger exposure than the long position of $3,300 on Exchange B, when the market declines, A's profit exceeds B's loss, resulting in a net profit. The decline in the spot market is hedged by the profits from the short position. (The premise of this strategy is that the hedged returns must be sufficiently high.)
5. The Core of Strategy: Sacrifice Returns to Reduce Risk
The brilliance of this strategy lies in: placing the most dangerous position (long position) in a less liquid exchange, while placing the most protected position (short position) in a relatively safe exchange.
If the dealer wants to blow up the short position on exchange A, he must:
- Invest a large amount of capital to conquer the deep liquidity of exchange A.
- The price he raised will also profit the long positions on exchange B.
The difficulty and cost of sniping have increased geometrically, making the operations of the dealer unprofitable.
Utilized market structure (liquidity differences) to establish defenses, and leveraged funding rate differences to generate additional returns (if any)
Finally, if there are any seriously nonsensical takeaways:
- The expected returns are poor, it’s better to just wash up and sleep, doing nothing.
- After reading this article, if you feel that the mechanism is very complex - that's right, so don't participate blindly;
- You, being smart, might notice that the space between one empty and one full is a “synthetic position”; understanding this principle is more important than making any trades.
- The main purpose of this article is to tell you: don't operate blindly, don't participate blindly, just take a look, really don't know what to do? Buy some BTC.
