DS Block

Market Update 03-May-2024

Principle — Fri, 03 May 2024 17:40:39 GMT

A summary of the current market conditions

Table of Content

Stable Coin Lending

Lending rates reduce this week and have been around 7% for USDT and USDC on most chains, this is down from around 10% from a couple of weeks ago. Demand for leveraged trading, that drives some of these high rates, has also dropped off this week.

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Futures Cash & Carry

Demand for Futures reduced further this week with funding rates on perpetuals remaining significantly negative on BTC -8.7% and ETH -3%. Longer term futures have been coming down as well. The Sep2024 ETH future is now at $92 above the index price which is significantly down from $224 two weeks ago.

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Automated Market Making

Markets were volatile this week which pushed up the fees collected from the AMMs well above double digits across most pairs. AMMs tend to perform well in high volatility environments.

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Delta & Stake

Staking rewards incentivize participants to secure the network, validate transactions, and contribute to the overall health and decentralization of the ecosystem. Staking rewards are relatively stable and tend to decrease over time as blockchains spend their treasuries which in part are used to subsidize these rewards.

Crypto market sold off double digits in the last couple of weeks

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Disclaimer: Please note that the information provided is for educational and informational purposes only. It should not be construed as financial advice or a recommendation to buy, sell, or hold any specific asset or investment strategy. Investing in digital assets carries inherent risks, and individuals should conduct their own research and seek professional advice before making any investment decisions. We do not assume any responsibility for the accuracy or completeness of the information provided, nor do we endorse any particular investment approach.

Market Update 12-Apr-2024

Principle — Fri, 12 Apr 2024 16:45:54 GMT

A summary of the current market conditions

Table of Content

Stable Coin Lending

Lending rates remained high this week, well above 10% for USDT and USDC on most chains. However demand for leveraged trading, that drives some of these high rates, has dropped off this week so we might see these lending rates come down over the next weeks.

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Futures Cash & Carry

Demand for Futures reduced further this week with funding rates on perpetuals remaining negative on BTC and just above 0% on ETH. Longer term futures have been coming down as well. The Sep2024 ETH future remained roughly unchanged at $224 above the index price.

Tell me how this works ...

Automated Market Making

Markets were volatile this week which pushed up the fees collected from the AMMs well above double digits across most pairs. AMMs tend to perform well in high volatility environments.

Tell me how this works ...

Delta & Stake

Bitcoin and Ethereum outperformed the rest of the market this week.

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Market Update 05-Apr-2024

Principle — Fri, 05 Apr 2024 12:16:39 GMT

A summary of the current market conditions

Table of Content

Stable Coin Lending

Lending rates are slightly softer this week, but still well above 10% for USDT and USDC on most chains. Demand for leveraged trading, that drives some of these high rates, has dropped off this week.

Tell me how this works ...

Futures Cash & Carry

Demand for Futures reduced this week with most recent funding rates on perpetuals going negative on BTC and very close to 0% on ETH. Longer term futures have been coming down as well. The Sep2024 ETH future tightened from $301 to $224 above the index price.

Tell me how this works ...

Automated Market Making

Fees collected from AMMs remained high for most major pairs and across blockchains as the market volatility remained high. AMMs tend to perform well in high volatility environments.

Tell me how this works ...

Delta & Stake

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Alt Coins

Principle — Mon, 18 Mar 2024 22:51:06 GMT

Alternative Digital Assets introduce innovative technologies in the areas such as smart contracts, privacy features, and scalability solutions and they tend to innovate faster than the established Digital Assets in the top 10. Investing in these projects gives expose to cutting-edge developments in the blockchain and cryptocurrency space.

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Small-cap stocks tend to outperform large-cap stocks over time as demonstrated by Fama & French more than 30 years ago. This can be attributed to Risk Premium, Market Inefficiency, Growth Potential and Market Sentiment. Alt coins are the small-caps of Blockchains

Historic price appreciation has been multiple time the original investment, but with a considerable risk of the value the of investment going down. Market risk is very high for this strategy.

Why it Works?

Blockchains are a fast developing technology with continuous innovation and large networks effects - who creates a niche technology has the potential to capture a large market;
Alt coins offer unique features or technologies that differentiate them from Bitcoin or Ethereum. These features give them higher potential for growth and adoption, leading to high demand and price appreciation in a market rally;
Successful market capture has potential for outsized returns

Key Risks

Capital at risk - Very High, potentially full loss of invested capital. Appreciation can be high in market rallies and equally devastating large in market drops.
Fraud - new companies and untested technologies can lead to dubious tactics: Pump and Dump Schemes, Exit Scams, Fake Projects and Inflated promises.
Regulatory Risks - a change in regulatory environment can impact the legality and market viabilities of new technologies.

Delta & Staking

Principle — Tue, 12 Mar 2024 12:10:40 GMT

Holding a "delta" to Digital Assets can provide diversification to a portfolio of traditional financial markets, as a hedge against economic uncertainties. The historical growth of Digital Assets underscores their potential for substantial returns.

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Staking offers a way for holders of digital assets to earn passive, single digital income, while holding a delta to Digital Assets and contributing to the security and operation of Proof of Stake blockchains.

Historic yields have been between 1 and 5%, but with a considerable risk of the value the of investment going up, or down with the price of the digital asset. Therefore this strategy exposes investors to yields and also the price of the asset.

How it Works?

Users pay fees to interact with DeFi applications running on the blockchains;
The blockchain bundles user transactions every few seconds and puts them into new blocks that are then added to the end of the blockchain;
The Fees are aggregated by the computers (nodes) that operate the blockchain. These fees are then distributed to Stakers;
Staking tokens generates yields in the form of fees and exposes the user to price appreciation;
A busy blockchain generates more fees;
A busy blockchain increases the demand and value of its tokens.

Why it Works?

Delta makes money in a rising market and provides diversification to traditional financial assets + a single digit Staking yield;
Staking improves the security and decentralization of a blockchain and this is rewarded with fees that the blockchain generates;
Higher blockchain adoption and more transactions increase fees. E.g. sending a stablecoin to another person incurs a small fee. This fee goes to those who Stake their Digital Assets.

Key Risks

Capital at risk - assets lose value in a falling market and gain value in a rising value.
Operational Risk - Errors in setting up and maintaining Staking nodes can lead to missed rewards or other issues. If a network experiences a critical vulnerability or a malicious attack, tokens could be at risk of being lost or stolen.

Automated Market Making

Principle — Tue, 12 Mar 2024 10:31:11 GMT

AMMs facilitate the exchange of Digital Assets on a Decentralized Exchange. They provide an automated and algorithmic way to execute trades and determine prices without relying on traditional order books or intermediaries.

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Market Making in financial assets is traditionally the business of investment banks - blockchains now offer a chance for anyone to participate in this trade

Historic yields have been between 10 and 60%, but with a considerable risk of the value the of investment going up, or down with the price of the digital asset. Therefore this strategy exposes investors to high yields and also the price of the asset.

How it Works?

Investors deposit equal amounts of 2 assets into a liquidity pool (e.g. 100 BTC and $5mn)
The initial price is determined by their ratio of inventories in the pool (e.g. 5mn / 100 = $50k per Bitcoin). This determines the starting price at which one asset can be swapped for the other. This price will change as traders swap assets and change the balance of inventories in the pool
The rules of the exchange are written in a smart contract that runs 24/7 on a blockchain;
Smart contract only allows Swaps if the product of inventories is preserved - this is an arbitrary number K, e.g. 500k*10 = 5mn, and is also known as the Constant Product AMM
A trader can take out 1 Bitcoin from one pool only if they deposit $50.5k into the pool, in order to maintain the product of inventories 50.5k*99 = 5mn , + a fee of 0.3%. This is controlled by the smart contract.
The 0.3% fee from every Swap goes back to the Investors who provided liquidity into the pool

Why it Works?

Investors who provide liquidity into a pool receive a 0.3% from every swap that is done with their liquidity;
Performs well in volatile markets when more trading is going on. More trading = more fees for liquidity providers;
Smart contracts manage the orders, once liquidity has been added there is little intervention required;
Has grown in popularity due to good user experience and available 24/7

Key Risks

Capital at risk - liquidity provides always sell the asset that is going up in price and buy the asset that is falling in price, for this they receive a fee. If prices fall significantly, the loss in value can be higher than the prospect of fees;
Smart contract risk - risk of bugs in the smart contract can lead to them being hacked and money stolen;
Stablecoin depegging - custodian who issues stablecoins might not be able to guarantee convertibility and this can lead to losses.

Price Risk when Providing Liquidity

Providing liquidity into a liquidity pool pays fees from the traders who use that liquidity by doing swaps. So there is a stream of fees to the liquidity provider. However, the liquidity provider is always on the wrong side of where the market is going. Traders go to a liquidity provider for liquidity. And when the market is rising, the traders are buying, which means the liquidity provider is selling.... and selling when the market is rising is not a good thing for profit.

When the market prices move the liquidity provider is always on the wrong side of the market . When the market is rising, the traders go to the liquidity provider to buy that asset, and when the market is falling the traders go to the liquidity provider to sell him the asset.

The liquidity provider always suffers from "negative gamma" which in the trader's lingo that if the market moves then he will be worse off than he started. And when the liquidity provider has negative gamma the trick is to make more profit from fees than what he loses from the negative gamma.

This is similar to selling options. The option seller gives someone an option to buy from them an asset at a certain price in the future, called the strike price. The option is very cheap if the strike price is very far away, but gets more expensive as the price rises and gets closer to the strike. This increase is not linear. And this no linearity is called the gamma effect.

The negative gamma is best illustrated with an example against a buy-and-hold strategy. The delta of the buy and hold strategy is always 1 which means for a 1% price in price the value of the portfolio changes by 1%. However, the delta of a liquidity provider is 1 only locally. As soon as the price moves away, even slightly, the change in value becomes less than the change in price - this is negative gamma.

Holding 0.5 BTC + 25k vs. Providing Liquidity of 0.5 BTC + 25k

Fees

When providing liquidity into a pool it helps when there is a lot of trading going through that pool. This is because every Swap pays 0.3% in fees to the liquidity providers. The chart below illustrates the effect that fees have on the overall profitability of the strategy at the end of the year at different levels of BTC. For a sufficiently long investment time horizon the fees tend to compensate for the negative gamma and fees also give a relatively stead stream of income to the investor.

Effect of Fees on total profitability. The chart shows the effect of 20% APY in fees on the strategy profitability at different BTC price levels

Futures Cash & Carry

Principle — Mon, 11 Mar 2024 17:20:13 GMT

Cash & Carry involves exploiting price differences between the spot and futures markets for the same underlying Digital Asset. The futures market usually trades at a premium to the spot market. The return exists as speculators want to bet on the direction of the market without providing the full capital for the trade (aka leverage) and are willing to pay a premium for this.

The Futures market usually trades at a premium to the Spot market. The return exists as speculators want to bet on the direction of the market without providing the full capital for the trade (use leverage) and are willing to pay a premium for this.

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Futures Cash & Carry strategies have existed for many decades in different markets. Oil traders will sometimes buy Crude oil and store them in ships so they can deliver them into the Futures Contracts that they sold.

Historic yields have been between 5 and 30% per year.

Why it Works?

Speculators prefer to buy a Futures Contract as it gives them leverage. When market are rallying, speculator want leverage and a willing to pay for it, this increases the spread
A Future Contract has a predefined Maturity date, at that date the Future’s price converges to the Spot price
The Futures Contract and Spot can diverge, especially when markets are hot.

Key Risks

Operational Risk - Unwinding the positions can are subject to the same timing risks therefore there is a risk of slippage and execution of a strategy at a loss.
Counterparty Risk - If an exchange becomes insolvent the funds could be at risk and lead to losses.
Trading Fees - congestion on the blockchain can lead to higher fees and longer withdrawal times

Stable Coin Lending

Principle — Mon, 11 Mar 2024 11:32:52 GMT

Stablecoins are Digital Assets designed to have a relatively stable value, usually pegged to USD. Unlike many other cryptocurrencies like Bitcoin or Ethereum, which can be highly volatile, stable coins aim to provide a stable and predictable value, making them suitable for financial transactions and applications.

Stablecoin lending in the crypto space operates similarly to traditional lending by financial instituyions, with the key difference being the use of stablecoins as the principal currency and being done on blockchains. Interest rate adjusts automatically to supply and demand - high demand equals higher % yield. Historic yields for lenders have been between 3 and 20% per year.

Blockchains reduce intermediation costs and speed up lending and borrowing transactions to a few seconds and reduce transactional costs, in some cases to under a $1 depending on the fees of individual blockchains

Why it works?

Traders borrow stablecoins for leverage;
Consumers borrow against crypto collateral to spend in shops and avoid selling crypto;
Decentralized platform adjusts interest rate to keep supply and demand balanced. More demand, higher rate;
Collateral is managed by smart contracts. Collateral is sold by smart contract if LTV rises above ~75%

Main Risks

Smart contract risk - risk of bugs in the smart contract can lead to money being stolen by hackers;
Market gap risk - if market drops, borrowers default and there insufficient collateral to sell funds could be at risk and lead to losses;
Stablecoin depegging from USD - custodian who issues stablecoins may not be able to guarantee convertibility

Range of Investment Strategies in Digital Assets

Principle — Fri, 08 Mar 2024 18:48:33 GMT

Blockchains have revolutionized the way we perceive and engage with financial assets. Blockchain now give access to a myriad of once unimaginable investment strategies. They have opened the doors to investment opportunities that previously were only available to large and sophisticated institutions.

Digital Assets are substantially riskier than traditional assets with a potentially larger upside. Moderate Risk strategies also available in Digital Assets with yield pick-up to Bonds. Holding digital assets can offer diversification benefits to a balance portfolio of traditional asset with a potential for very high gains.

Custody

Principle — Tue, 23 Jan 2024 09:04:25 GMT

Crypto custody means securing the private key held within your crypto wallet. In traditional banking, all custodians are financial institutions, as required by law. With crypto, however, holders can become their own custodians. Using gold bars as an analogy, you can either store them under your bed to keep them safe yourself or pay a third-party custodian to lock them in a vault protected by security guards.

Table of Content

Self-Custody

Self-custody is when you hold the private key to your own wallet. This means you are the only one who can prove ownership of your funds and access your holdings. Being your own custodian means having complete control over your wallet, but it also means you also bear all the risks. If you lose access to your physical device (cold wallet) or forget the private key, your crypto will most likely be gone forever.

Pros:

You own the keys and have direct access to the crypto assets. Only you have access to the account;
No counterparty risk. There is no third party between you and the crypto assets. Defaults of crypto exchanges do not affect you directly.

Cons:

Losing the keys means losing the crypto assets, and the assets are not insured
Risk of exposing the keys to hackers, which can lead to loss of fund

Multi-Signature Wallets (MS)

A Multisig wallet is a type of digital wallet used to secure and manage cryptocurrencies or digital assets. It incorporates the concept of multiple signatures to authorize transactions, providing enhanced security and control compared to traditional single-signature wallets. Usually two of three signatories will be required to sign off on any given transaction, this will be the case in respect of this Fund. If this is not possible due to any reason, then the transaction must be signed off by using a physically stored and secured computer.

Hardware Wallets (HW)

Hardware wallets are physical devices specifically designed to securely store private keys and facilitate the secure management of cryptocurrencies. It provides an offline, isolated environment for key storage and transaction signing, offering an added layer of security compared to software or online wallets.

Overall, hardware wallets provide a convenient and secure way to store cryptocurrencies, offering protection against online threats such as hacking, malware, or phishing attacks. They are particularly recommended for individuals who hold significant amounts of cryptocurrency or prioritize robust security measures for their digital assets.

Multi-Party Computation (MPC)

Multi-Party Computation (MPC) transforms the traditional storage of private keys and sensitive information by breaking up and encrypting them, distributing the encrypted shares among multiple parties. This eliminates the vulnerability associated with a single point of compromise, where a complete private key is stored. In MPC, each party independently computes its part of the private key share, producing a signature without revealing information to others. The private key is never consolidated in one location, ensuring a fully decentralized and liquid form.

MPC prevents reliance on a single secure device or party, reducing the risk of theft. Rather than trusting one entity with the private key, MPC decentralizes it across various parties or devices, ensuring each remains oblivious to the others. When needed, MPC verifies approvals from all parties or a predetermined subset before utilizing the key.

This approach significantly raises the difficulty for potential hackers, as they must now target multiple parties across diverse platforms and locations simultaneously to gain control over a user's wallet. MPC addresses the challenge of secure key storage and allows more personnel to access a wallet without risking rogue behavior. Additionally, with the private key secure, users can hold assets online, eliminating the need for cumbersome cold-storage devices. This enhances the fluidity of transferring digital assets without compromising the balance between security and operational efficiency.

Third-party Custody

Those who do not want to take the responsibility of managing their own accounts or find it too intimidating to deal with the tech might want to turn to a third-party custodian. These are registered, regulated financial institutions that have acquired a state-level or national license to act as a custodian.

This type of crypto custodian holds clients’ private keys to their wallets in a safe manner and ensures the security of their holdings. From the user's point of view, it is similar to having a checking account with a bank. When you register to open an account, you must undergo know-your-customer and anti-money laundering checks. When you store crypto with a third-party custodian, you’ll be expected to complete the same sort of checks to make sure your cryptocurrency was not acquired through illegal means.

Pros:

The service provider takes care of managing the keys and provides insurance on the crypto assets they hold
Easier to access for beginners and who doesn't have the technical skill so secure the wallets

Cons:

Not your keys, not your coins. The custodian ultimately controls your wallet
Third-party risk, the custodian can be hacked, or go bankrupt
The fees can be high

Choosing one over the other needs to be carefully weighed, considering how familiar the fund's members are with working with crypto wallets and how important the self-custody is in principle for the members.