How A New Ethereum Product Will Give You Free Money: The ETH Fountain
Nothing is really free in investing, but this is about as risk-free for money as you can make in the crypto space. And now that Ethereum has completed its merge, institutional players with ESG mandates can start buying ETH–which should be a long-term catalyst for its price.
Our goal in this piece is to look at how a new crypto product can help you develop a trading strategy to nullify ETH price movement and net ETH yield while we make our way through this crypto winter.
As usual, paid subscribers get signals for when the algorithm re-enters the market. But everyone can benefit from this strategic approach. So, let’s start with the new product.
A New Ethereum Product
To begin, I need to clarify two points. In one way, a version of this product has existed for quite a while. They’re called options, and the use of perpetual options in the crypto world marks a real improvement over the traditional sort.
What we’re going to discuss here, however, is much easier to use than options. You don’t need to bother learning the options “Greeks” and you won’t have to use some formulation of the Black-Scholes model to discern your price returns.
The second point of clarification is that those of you who are in the US may have a harder time using this strategy. It turns on using coins from IndexCoop, and they will geo-fence you. It’s not illegal for you to own these coins, they’re just trying to protect against possible SEC litigation. To avoid that, download a VPN program and use it. ExpressVPN is cheap and easy, but there are others.
Now let’s start by going to the Index Coop Products page. You’ll be wanting to use the Inverse ETH (InvETH for short) for this strategy.
What does it do? Well, it goes the opposite direction of ETH. If ETH goes up $1, this goes down $1. When you bet on something going up, that means you have a long position. When you expect it to go down, you have a short position. This is pretty much a short ETH coin (it’s not actual shorting, but simulates that).
This is a 1x position, meaning that it’s 1 for 1. It’s not 2 for 1 (or 3 for 1, etc.). The problem with those 2x (and more) positions is that you get what’s called volatility drift. That’s the difference between what the underlying 2x should be and what’s actually happens in the market.
In theory, this product shouldn’t experience drift even during volatile times. The AOTB team will introduce a drift analysis into our monthly rotation of data points just to monitor that. We post this for free on our webpage news (and on Twitter).
In what follows, we’ll look at how to pair this product with ETH to net “free” money.
The ETH Fountain
Think of this as a recipe for investing. I’ll use example numbers–multiples of 10 to keep the math easy.
Ingredients: Buy These
- 10 ETH (from anywhere)
- 10 Inv ETH (from IndexCoop)
Stake: 10 ETH for yield (8% on yearn.finance)
Profit: 4% ETH total yield + no exposure to ETH declines
Mix the proportion of ETH to InvETH to suit your taste for risk or where you think the market is headed.
- For example, you could have 10 ETH to 8 InvETH to make your portfolio have a 20% long exposure (net long in finance jargon).
- Alternatively, you could have 8 ETH to 10 InvETH to make your portfolio have a 20% short exposure (net short in finance jargon).
The main idea here is that you can completely neutralize ETH’s price volatility and net the staking yield “for free.” If you’re familiar with options, this is close to taking a long position in a basis trade, except that the yield return is guaranteed here (though a basis trade could be more profitable).
Now, let’s discuss a twist on this idea.
Crash Cost Averaging Twist
For a refresher on what crash cost averaging is (as opposed to dollar cost averaging) go here. The idea is that you are going to buy at fixed percent interval declines in a crypto winter, rather than every week (which is a temporal interval). This did better by 180% in backtests, and its presently killing all “smart money” competitors in the crypto space, such as Binance and a16z.
Here’s how we can combine it with The ETH Fountain strategy above.
Step 1: Perform The ETH Fountain strategy just described above.
Step 2: Sell InvETH at target intervals of decline (each -6%) following the Crash Cost Averaging strategy. For example:
- 72% decline from all time high – $1344
- 78% decline from all time high – $1056
- 84% decline from all time high – $768
This simulates buying in at those prices while earning ETH yield. What do you do with the money you earn from selling your InvETH?
Again, vary to suit your taste in risk. But you could sell your InvETH and yield farm that. Or, you could sell it and buy more ETH (simulating a double-sized entry position). Or you could buy something else.
At some point, yes, you’re going to have to sell out of your ETH position when the market goes back up. When do you do that? Well, it’s a bit tricky.
That’s why we provide a paid service with algorithmic signals that identify selling points. It’s done very well since the 2018 crypto crash, and year to date it’s out-performing the “smart money” (in yellow) by about 100%.
At the very least, you can use the strategies in Lessons 1 – 3 of The Art of the Bubble guide to help with that part.
This is really just the beginning of the idea. I think there is significant value to be derived in applying it to NFTs. Suppose, for example, that you have a Bored Ape at a “mere” 75 ETH. Well, you could buy 75 InvETH to neutralize any price declines in the US dollar value of ETH.
(Let’s put aside the idea that you have 150 ETH to casually invest with, as this is an illustration).
Note, the Bored Ape could lose value in ETH. It could fall in demand from 75 ETH to 60 ETH, for example. The InvETH would do nothing to nullify that loss. But it would nullify the loss you’d get if ETH’s US dollar value fell from $1450 (at present) to $1000. And it’s the latter loss that matters. Just look at the performance of NFT blue-chips in terms of ETH.
Down 68% in terms of USD, but only 18% in terms of ETH.
Here’s the really interesting thing, you can go to sites like NFTX and stake your nfts for 45% APR. Or take the same idea to SudoSwap and run an NFT pool.
Anyway, you get the idea. It’s a super easy way to hedge your ETH holdings and that allows for some really interesting ways to net yield without taking on the risk of ETH’s price volatility. That’s a yield about as free as anything gets in the crypto world.
This week I was super preoccupied with the ETH merge, but I still wrote two pieces that are related to this post, so you might want to have a look if you’ve missed them.
That’s it for this week. Remember to join us on Discord if you haven’t already.
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