June 18, 2022
ETH - 18 June 2022 - Dopex Community Token AnalysisCommunity-Analysis-Series
ETH - 18 June 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.
Blood in the streets and red charts for ETH
Token & Position Introduction
Since the collapse of Terra it has been bad news after bad news. The price of ETH is teasing the four figure mark, down from $4.000 in December. By now, it definitely feels like a bear market. So what do we do from here? What’s in store for ETH and how do we want to trade our way through this? I’ll walk you through a quick summary of the market and introduce a way to use Dopex options to hopefully juice our returns over the next few months.
Quick Stats (at time of writing)
- Price: $1,067
- Marked cap: $129,190,984,273
- Circulating supply: 121,178,654 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. Coming soon (estimated Q2 2022) there will be the famous ETH merge, where the Ethereum network will migrate from a proof-of-work consensus mechanism to a proof-of-stake mechanism. This is an important catalyst for ETH as the success or failure of this merger will determine the future of ETH.
Position & Analysis
I believe anyone who is bullish towards DeFi should also be bullish towards ETH. The two are inexorably connected, with wrapped-ETH tokens appearing on every blockchain and a market cap greater than all other blockchains combined (save for Bitcoin). You can make a solid case that to some extent ETH is DeFi. Therefore the drop in price is extremely good news for anyone who is bullish on the long term outlook of Ethereum and DeFi as a whole.
In this article we will be taking a look into ETH on three levels:
- What is the long term outlook for ETH?
- What do we think the medium term outlook will be?
- How do we increase our returns in this scenario?
First of all, does this mean the end for ETH? At the moment, Ethereum has a market cap of 124 billion dollars. Less than half what Bitcoin has. Meanwhile the “ETH killers” Solana, Cardano, and Polkadot have market caps of $9b, $15b, and $8b respectively. This is not even close to what Ethereum boasts. Not to mention those blockchains suffering from systemic issues.
The popular bridging tool Synapse has a wonderful analytics page showing the bridge volume between various blockchains (analytics.synapseprotocol.com). The most popular chains (besides ETH) appear to be Avalanche and Arbitrum with a total combined bridging volume of $2.9 billion. I believe that while there is certainly space for multiple blockchains in the future, there is no reason to believe that Ethereum will ever lose its spot as number one.
But what about the medium term? For Ethereum to recover to its peak it will need to regain over $350 billion in market cap. With stocks down across the board, interest rates on the rise, and regulation looming on the horizon it looks like we might have some time before recovery might happen.
So where do we go from here? If you’re bullish on the long term outlook of ETH but believe we may have a while to go before the price recovers, then Dopex offers a great solution to earn boosted yields by selling options to speculators hoping for a sudden price increase.
A common long term strategy for investors looking to increase their yields is selling covered calls. A covered call is when you sell an option giving an investor the right to buy your security at a given price (called the strike), above what the asset is currently trading for. The investor pays a premium for this contract and as long as the price remains below the strike-price of the contract you earn a premium. However, if the price increases above the strike of the options contract you are forced to sell the asset at a lower price than it would trade for on the open market.
This is perfect for long term investors looking to earn increased rewards during a bear market. If you believe in the long term outlook for ETH but also think the price won’t recover any time soon, then selling covered calls is a great way to get some extra yield from your ETH.
The strategy for ETH is to deposit wETH on Dopex and sell call options to earn a premium. At the time of writing the price of ETH is $1,067 and call options with a strike of $1,800 sell for a 21.65% APR and a strike of $2,200 sells for a 9.61% APR.
In order to earn these kinds of yields you need to bridge your ETH to Arbitrum (this can be done with Synapse). Then, exchange this for wETH and head to the Dopex SSOV and deposit your wETH into the ETH vault with your preferred strike price. Dopex offers both weekly and monthly calls with various strike prices for your risk tolerance.
What if this goes as expected? What if it goes really wrong? What if it goes really well? What do you stand to gain or lose, and how likely is each scenario?
Base Case Scenario: Our base case scenario is that the current market conditions continue for a while while we sell calls without the price exceeding our strike and causing our options to get liquidated.
Bad Case: The worst case scenario would be a sudden price increase, causing the price to exceed the strike of our options and forcing us to sell ETH at a lower price than the market.
Good Case: Our best case scenario would be for the current volatility and price action to continue, keeping the premiums high while never allowing our options to get executed and accumulating more ETH along the way.
I currently hold ETH and DPX and have deposited some of the ETH on Dopex to sell covered calls. This is not financial advice, I am just a stranger on the internet.
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.
Dopex is a decentralized options protocol that aims to maximize liquidity, minimize losses for option writers and maximize gains for option buyers — all in a passive manner. Dopex uses option pools to allow anyone to earn a yield passively. Offering value to both option sellers and buyers by ensuring fair and optimized option prices across all strike prices and expiries. This is thanks to our own innovative and state-of-the-art option pricing model that replicates volatility smiles.
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