For HODLers, instead of holding your beloved coin still, farming might be a good option to keep its value growing. However we all know if it’s not a farming on stable coin pair, there might be an impermanent loss caused by its price fluctuation. Therefore we are granted with a special shield called “short hedge” which is an insurance for investors to secure their capital. So they can eat and sleep well with no worry.
We are going to demonstrate short hedge by using BINANCE Future, but Future on any platform is ok too. This will be a guideline for beginners, so it’s better to follow this path and once you are familiar with it, you may adjust any number as you see fit to your own strategy.
Assume you have $1000 to farm and you want to secure your capital. There are 2 options
1. Select a pair of both stable coins, but the return may not be very attractive.
2. Select a pair of volatile coin and stable coin, but that volatile coin has to be available in Future market such as BTC, ETH, ADA, BNB etc.
Some may have a question why not a pair of both volatile coins. Actually it is ok too, but need hedging on both coins. So I’m not taking this for an example. Once you understand Short Hedge strategy in detail, feel free to go further complicated to generate higher return.
For this example, we’ll take BNB-BUSD as a model. From your $1000 capital, divide it into 70:30, 70% to farm, and 30% to hedge as we want a full coverage on our capital. Anyway these numbers are not fixed. During the bull market, some may not see the necessity of having 30% of their fund setting aside for insurance, but who knows the bear time like April 2021 will begin, or bulling August 2021 will end. Short hedge is an insurance, so you have a choice to buy or not to buy, or buy less coverage. This is based on individual’s judgement. But I’ll stick with the objective initially set to secure 100% investment and set 30% for short hedge as an insurance.
To farm BNB-BUSD with our 70% ($700), we’ll buy BNB 35% ($350) and BUSD 35% ($350) equally to provide liquidity and get LP for farming. The remaining 30% ($300) will be transferred to Future wallet and we will “SELL” or “SHORT” BNB the same amount we have bought $350 to farm. Beginners may come up with a question at this point how $300 Short can cover $350 BNB. Thanks to the power of Cross (X) that enables you to open position with less amount, x15 should be appropriate as we don’t want too high risk for our position to be liquidated, in other words, wiped out. So we input Amount $350 same as our BNB value at the same price or nearest to what we have bought BNB initially, then open position and you are all set to secure the capital, and fully enjoy return on farm.
As the time goes by, we may have to check our position once in a while, but X15 should be ok for us to eat and sleep with no worry that our position will be liquidated too soon.
To check up financial health of your farm, some Defi’s dashboard can be clearly seen, but even if it doesn’t show our farm value, we can also use Apeboard, or HowMuchIsMyLP to monitor its value.
Given two scenarios after a period of time, BNB price may either go up or down.
BNB up: Farm PNL +, Future -
BNB down: Farm PNL -, Future +
In any cases, one way up+ and the other down- will offset one another and give you 100% secured capital or maybe slightly less due to gas, fee, decimal shift etc. But you can surely harvest farm yield 100% as APR or APY posted.
Enjoy the return!!!
