Bearish accumulation
Accumulating long-term holdings in a bearish market environment
Last updated
Accumulating long-term holdings in a bearish market environment
Last updated
Alice owns 100 ETH and wants to accumulate more of it. The market environment is bearish and she believes that it will stay like that for a while with ETH/USD dropping below $1‘000 within six months, 71% down from its current value of $3‘500. Alice wants to capitalize on her view, but she doesn’t want to lose more than 3 ETH if she turns out to be wrong.
One potential strategy involves selling 24 ETH at the current price of $3‘500 and buying back at $4‘000, hence locking in a loss of 3 ETH if she turns out to be wrong and ETH price continues to rise. If she is right and the price drops to $1‘000, she will be able to buy back 84 ETH increasing her holdings from 100 to 184 ETH (+84%).
Alice can achieve a higher return without taking additional risk by using derivatives. More precisely, Alice could create a deep out of the money short position, paying 3 ETH to hold it. If ETH price is at or below $1‘000 in six months, Alice will receive 100 ETH resulting in new total holdings of 197 ETH (+97% in a month), 13 ETH more compared to simply selling the asset and buying it back later.
Alice could use the following parameters to configure the desired short position using the DIVA App:
After creating the pool, Alice sells all 100 long position tokens minted for a total of WETH 97 to Bob and keeps the short position tokens, effectively paying a price of WETH 3 for the 100 short position tokens she has minted.
