ETH - 11 March 2022
The Dopex Community Analyst series is a collection of strategies, ideas, opinion pieces and educational resource written by independent contributors from the Dopex community. Every month many knowledgeable community analysts share a short analyses of a coin of their choice and share these with Dopex. The goal of these articles is to empower the community and help Dopex increase SSOV volume & deposits. With these articles we hope to provide users with additional information that will help them in making an informed choice of strategy using our products.
Without further ado let’s jump into the first article.
Hedging the Black Swan with Dopex Options
by CryptoPlainview
Token & Position Introduction
Ethereum is the 2nd largest cryptocurrency with a market cap exceeding $300B. As ether has matured into a widely traded global asset, its price is now much more sensitive to broader macro concerns.
Quick Stats (as of March 4th 01:26 UTC):
- Price: $2,722
- Circulating supply: 118,340,240
- Circulating supply valuation: $321,755,246,742
Tokenomics
Ethereum currently issues 2 ETH every block as a reward to miners. Since the London hard fork of the network with EIP-1559 went live last August, a percentage of gas fees are burnt every block which offsets some of the inflation from block rewards. The exact inflation rate of ETH is thus a function of gas prices and network activity. For the trailing 30 days, the amount of burnt tokens was equal to about 52% of the mining rewards during the period
Position & Analysis
The geopolitical landscape appears to be in a state of uncertainty as we head into the month of March. The Russian invasion of Ukraine is ongoing, and major economic sanctions have been levied against Russia. It is unclear how this situation will resolve, and how much damage will be done in the process.
In addition to concerns related to the fallout of the war, the FOMC in the US will be meeting on March 15-16. Fed chairman Jerome Powell hinted at a 25bps hike of interest rates during a congressional testimony this week. However, If the Fed announces a more aggressive rate hike, or plans to reduce its balance sheet, the markets for risk assets may be affected sharply toward the downside.
As an owner of spot Ethereum, I believe in the long-term value of the asset. However, the rising geopolitical tensions and macro uncertainty could lead to a massive crash in March depending on how events unfold.
Strategy
One way to mitigate risk from the current macro uncertainty is to purchase out of the money (OTM) put options against spot ETH as a hedging mechanism. Dopex currently offers 4 different strikes for ETH puts ($2500, $2200, $2000, $1600). A small allocation of puts can help drastically reduce the downside for your portfolio in the case of an unexpected tail-event. Using the remaining spot ETH in DeFi farms, such as the Dopex ETH Call SSOV, can help pay for our downside option protection.
For example, on a bounce, let’s take 1.5% of our ETH position and sell it for stablecoins. We’ll spend half of the proceeds to buy $2,500 strike puts, and use the other half to buy $2,200 strike puts. At the time of this writing on March 2nd, 23 days before options expiration, ETH was trading at approximately $2,950. The prices for $2,500 and $2,200 put options were $78.06 and $33.45 respectively. The premiums are subject to change, depending on market conditions - so double check the market data prior the execution.
Possible Outcomes
In the event that the ETH price sustains above $2,500 and the options expire worthless, we will only lose the premium spent to purchase the options. However, if ETH were to crash below $2,000, our options will now be paying off big-time and our total downside from holding spot ETH through the crash will be mitigated somewhat. The chart below displays the estimated portfolio performance with our 1.5% put option allocation vs. unhedged.
We’ve capped our downside to a roughly 25% drawdown on a USD basis, regardless of the performance of ETH throughout the epoch. If we were to denominate our portfolio in ETH, the gains from the options expiring in the money are even more dramatic.
In the event of a cataclysmic crash to $1,500-$1,900, we would have increased our ETH position by 18-48% compared to simply holding spot ETH
**Disclosures
**The author of this article has a spot position in ETH, as well as Dopex tokens DPX and rDPX.
**Twitter
**@CryptoPlainview
TLDR
https://twitter.com/CryptoPlainview/status/1499575440754757642
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Views expressed in this article are the author’s own and not reflective of the position or professional views from Dopex.io.
Dopex reimburses analyst contributors with a small payout to partially compensate the time spent on research and writing. For questions feel free to jump into our discord (discord.gg/dopex) and chat with the team or analyst contributors directly.
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