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The Wolf Den #484 - The Purpose Of Derivatives

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April 22 · Issue #484 · View online
The Wolf Den Crypto Newsletter
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The crypto community is somewhat obsessed with leverage trading, taking huge bets with high leverage on the smallest of moves by Bitcoin and other assets. The recent chop has wiped out a lot of unsuspecting positions minimizing profits at a time where making money should be protected. This begs the question of why derivate contracts exist, what their intended purpose is, and how they should properly be utilized.
The primary purpose behind derivative contracts is the transfer of risk without the need to trade the underlying asset. This allows for more effective risk management. In addition, the derivatives market plays a role in information discovery and market efficiency. 
The futures market aids in price discovery. Futures prices can be thought of as a forecast of future spot prices, but in reality, they only provide a little more information than the spot price. However, they do so in an efficient manner. A futures price also provides an indication of what price would be acceptable to avoid uncertainty. This can help to reduce volatility as traders can see the theoretical fair price of an asset in advance and bet accordingly. 
In the case of options, one of the characteristics of the asset underlying the option is volatility and by using option pricing models, the volatility of the underlying asset can be determined. This is the volatility implied by the price of the option. The level of implied volatility is a good measure of general uncertainty in the market or a measure of fear.
There are also some operational advantages to the derivative market:
  • Derivatives have lower transaction costs than transacting in the equivalent underlying asset.
  • Derivatives markets typically have greater liquidity than the underlying market.
  • Derivatives allow short positions to be entered into easily.
Markets can be thought of as reasonably efficient. When prices do deviate from fundamental values, the derivatives market offers a low-cost way to exploit the mispricing. Less capital is required, transaction costs are lower, and shorting is made possible.
Investors are also far more willing to trade if they know they can manage their risks. This increased willingness to trade increases the number of market participants which increases market liquidity.
Why does this matter?
Because most retail traders use options and derivatives to speculate with too much leverage on the short-term price action of an asset. That is not the intended purpose.
Options and derivatives are meant to be used as a risk management tool - a way to hedge against a larger spot position with lower fees, less risk, and more flexibility.
If I short an asset, I generally make far more money being wrong than being right, because I am shorting against something that I hold a large quantity of in the spot market.
Right now, if you just hold spot crypto, it’s really hard to fail, I personally don’t see much of a use in these contracts unless you are unsatisfied with the returns the market is offering or you are looking to hedge. Understand the purpose of the products you are trading and use them accordingly.
In This Issue:
  1. The Purpose Of Derivatives
  2. Bitcoin Thoughts And Analysis
  3. Justin Sun Launching Algorithmic Stablecoin
  4. Itheum Launching On Maiar
  5. My Recommended Platforms And Tools
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Bitcoin Thoughts And Analysis
DAILY CHART
Ugly candle. Yesterday started off well, but ended with a major rejection at local resistance and price back in the small range. Hard to know what comes next, as Bitcoin has once again become a choppy asset ranging sideways.
Still holding a higher low.
4-HOUR CHART
RSI did not hit overbought… but only missed by a small margin. And what happened? Clear bearish divergence with RSI and a price drop. This is once again one of the most effective signals for tops and bottoms of moves, depending on your time frame.
Justin Sun Launching Algorithmic Stablecoin
Justin Sun to launch algorithmic stablecoin
Justin Sun made a big announcement on twitter. In just under two weeks, Tron is launching USDD, an algorithmic stablecoin managed by TronDAO. Very similar to Luna’s approach, USDD plans to rely on $10B worth of crypto as backing to maintain the peg.
The concept is this - when $USDD drops below $1 USD, users send in one $USDD and receive $1 worth of TRX. When USDD is higher than $1, users can send in $1 worth of $TRX and receive one $USDD. As the name suggests, it’s an algorithmic balancing act for maintaining a stable value.
The question on everyone’s mind is what the $10B in collateral will be. Sun didn’t state which assets would serve as collateral but did say, “highly liquid assets raised from initiators of the blockchain industry.” If Bitcoin becomes the token of choice, and algorithmic stablecoins become popular, this will be quite a win for Bitcoin.
Itheum Launching On Maiar
Itheum
We're excited to announce the moment you've all been waiting for!🎉

$ITHEUM will officially be listed on the @MaiarExchange on April 25, 2022 at 16:00 UTC 🔥

Learn more on our blog 👇

https://t.co/vvZwggM6nK
Elrond has long been one of my favorite projects and teams and has been the most profitable asset that we have ever shared and invested in in this newsletter. We first presented their original coin ERD at 15 sats, which eventually went over 300 before rebranding to EGLD. At that point, we did another 50 X.
Elrond has become a top 40 project and I still think it’s undervalued. I am a huge fan, friend of the team, and personally invested in everything they do. I have bought every coin in the ecosystem to show support and because I believe they will do well.
On April 25, 16:00 UTC, Itheum is set to go live on the Maiar DEX and undergo a 3-day integration process. As a basic overview, Itheum is a token that empowers data ownership in Web3 and the metaverse.
For those of you new to token launches, it’s important to note that volatility is expected during the initial listing. There are a lot of people anticipating the launch, which is why Elrond has taken precautions to ensure the process is as stable and fair as possible. I included a blog HERE that covers more detail about the coin and listing. There is no reason to FOMO in right at launch, there is always plenty of time to let the dust settle and decide whether an investment is right for you.
Again, I am invested in both Elrond and Itheum.
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The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor. Nothing contained in this e-mail constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to “Buy,” “Sell,” or “Hold” an investment.
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