October 4, 2022
ETH - 04 October 2022 - Dopex Community Analyst Series
ETH- 4 October 2022
The Dopex Community Analyst series is a series 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 our next article.
September ETH Analysis
Token & Position Introduction
After a few volatile months the merge is finally behind us and it’s looking like a great success. Energy consumption is down 99.95% and ETH issuance is down 90%. On top of that, ETH is now deflationary whenever gas prices are above 16 gwei (which has already happened once on September 21). All of this is incredible for ETH and a great improvement on an already phenomenal piece of technology. Sadly, this is not yet reflected in the price as it is currently down 18% since the last article. This can have many possible explanations but only one cause, our favourite option strategy of writing covered calls has once again prevailed. With the ETH special vault coming to an end on the 30th this is as best a time as any to write about ETH for the month and evaluate our positions. For those who missed it, Dopex has introduced a bonding program for those interested in purchasing discounted $DPX and on the 27th there will be a mint for the second generation of the legendary diamond pepe’s NFTs.
Quick Stats (at time of writing)
Price: $1,327 [25 September]
Market cap: $160,081,821,419
Circulating supply: 120,672,390 ETH
ETH is the utility token for the Ethereum network. All interactions with the Ethereum network must be paid for with ETH. This makes it an essential building block for the infrastructure of crypto and DeFi. Since the merge took place the tokenomics for ETH has changed slightly. The daily issuance of new ETH has gone down from 14.600 ETH before the merge to 1.600 post-merge. This results in an estimated decrease from 4.62% issuance to 0.49% issuance. This means that annually an estimated 0.49% of the current supply is introduced. This is on top of the aforementioned fees that are paid to interact with the Ethereum network. These two factors mean the supply of ETH will be constant at an average gas price of 16 gwei, anything above that and ETH is deflationary while anything below that makes ETH inflationary.
Position & Analysis
Despite all the hype around the merge, the price of ETH appears to have dropped significantly over the past month. Trading at $1.327 it’s down 18% from the last article. However, as mentioned above, the network has received a significant upgrade which should increase the fundamental value of the network. If you were bullish towards ETH during the hype last year I see no reason to change position because the price is lower. Fundamentally, the Ethereum network is now better than ever. Sadly though, that doesn’t change the macroeconomic outlook and doesn’t mean the price will soar overnight. Lucky for us, Dopex allows us to sell insurance contracts to those looking to protect their positions or speculate on price movements with options.
With the current maco-outlook trending bearish, I find it hard to imagine the tables turning quickly. Interest rates are rising, layoffs are increasing, more and more people are announcing their woes for an upcoming recession. Sadly, ETH is still highly correlated with the market so I don’t see the upgrades for ETH winning over the broader market sentiment for now. According to www.macroaxis.com ETH and the Nasdaq-100 have a .79 correlation coefficient.
This means the market seems to price ETH more as a tech-stock than as its own asset class. As such, it seems safe to assume that ETH will behave roughly the same as we expect tech stocks such as $GOOGL or $AAPL to behave and the outlook there is rather bleak. As such, my position here is conservative but bullish in the long term.
For months now I have been talking about selling covered calls through Dopex and so far it has remained the winning strategy. With volatility high premiums are also high and that means money for options sellers. By selling covered calls you get to collect a sweet premium for holding ETH and only lose potential profits in the case of a sudden leap in price. For people looking to hold their ETH this is still my favourite strategy out there. The implied APY for depositing ETH in the weekly SSOV is currently around 10%, a great yield for holding an asset such as Ethereum.
However, given the current economic climate you may be holding some more stablecoins in your portfolio than usual while riding out the storm. In that case, Dopex offers some options to earn extra yield on your stable coins by speculating on the price of ETH and providing liquidity to those looking to do the same. The two options here are to either sell put options or straddles. With a put option you are depositing stables with the promise to buy ETH at a certain price. This gives you either cheap ETH or a nice premium. Personally, this is a favourite of mine and a great option for times like this where you may want a cheap entry. The current apy for this strategy is a nice 15% and certainly a very attractive way to earn some extra yield and potentially get a nice entry for more ETH on the way. If you’re holding both ETH and stables then this is a great way to get some extra yield on these assets.
Combining the covered call with the covered put we end up with a covered straddle. These differ quite a bit from the Atlantic Straddles offered by Dopex. The Atlantic Straddles are a similar setup but they differ on a few key points. With the Atlantic Straddle 50% of your collateral is sold for at-the-money put options while 50% stays in stablecoins. When buying this Atlantic Straddle you pay a premium for this put option while the stablecoins are converted to ETH. This gives the seller short put exposure and the buyer long straddle exposure. For more information on the magic of Atlantic Straddles see this article. With this covered-straddle however, we won’t have to sell our options at the money and can decide how wide our spread will be. If ETH goes up we collect our premiums and may have to sell ETH for a lower profit than what we could get on the open market, but if it goes down we still collect our premiums plus we get to buy cheap ETH. I like to see this strategy as being paid to place a limit order on ETH.
Base Case Scenario: The base case scenario is that the price of ETH continues to trend around the same range. We get to collect some nice premiums while riding out the storm.
Bad Case: The worst case scenario is that the price of ETH moves up or down beyond our strike price. If the price goes up too much we have to sell our ETH for less than we would have on the open market (but still keep our premiums). If the price of ETH goes down too much we still get our premiums but are forced to buy ETH for a higher price than we could get on the open market.
Good Case: The good case for us is for things to continue as they are. If things drop a little we can buy some cheap ETH and continue writing options to get cheap ETH and nice premiums.
Contact and Q&A
If you have any questions or feedback feel free to message me on twitter @BowtiedProngHrn.
I also have a free substack where I write articles helping software developers get started as web and web3 developers.
I currently hold ETH and DPX. This is not financial advice, I am just a stranger on the internet.
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