Bearish accumulation
Accumulating long-term holdings in a bearish market environment
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.
⚙️ Pool configuration
Alice could use the following parameters to configure the desired short position using the DIVA App:
🤝Sell long position tokens
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.
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