Comprehensive analysis of CeFi dual currency wealth management: a risk hedging method combining wealth management and options

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Author: Louyue structured wealth management products, as an important part of the traditional financial derivatives market, have achieved considerable development in terms of market size and product types. In order to meet different target customer groups, traditional financial products on the market have gradually changed from From simple time deposits and treasury bonds to products such as funds, stocks, trusts, futures and options with more complicated rules derived from them , a complete structural system has been formed from the shallower to the deeper .

As an emerging financial field, the cryptocurrency market is gradually in line with the traditional financial market in the process of continuous advancement and development. Chain Wen previously discussed the most basic single-currency financial products in the crypto industry in the “”. As the second article in the CeFi financial management series, dual currency financial management , this article will analyze and discuss the development, definition, operation mode, benefits, risk points, suitability of the population, and institutions that provide services from dual currency financial products. .

The diversified evolution of financial products

Since the beginning of summer, the ” liquid mining boom ” in the DeFi field has ushered in a blowout development. Some project head mines have attracted funds with a return rate of hundreds of thousands or even tens of thousands. Project hotspots such as ” decentralization “, such as lending, exchanges, aggregation, and insurance, flood the market one after another. If some decentralized projects with a high degree of attention and good project endorsements further open the liquid mining function, the gold absorption effect will be very obvious.

In sharp contrast to this popular phenomenon, the CeFi (Centralized Finance) field is similar to the development process of traditional banks, stock exchanges and various financial institutions , and its financial product update iteration process is relatively conservative. .

For wealth management products, the current cryptographic field is relatively highly accepted and has a wide range of users, which are single-currency gain-based products with stable returns and low risks. However, with the expansion of the financial attributes of cryptocurrency derivatives, more institutions and investors have further demand for the allocation and benefits of financial solutions.

Some investors are willing to pursue medium- and high-yield diversified wealth management products on the basis of taking certain risks, such as dual currency wealth management, staking, lending, strategic trading, etc., gradually gaining a place in the market.

For example, Binance Mining Pool launched ” Binance Mining Pool Dual Currency Wealth Management Products ” at the end of August, and slogan “No fear of currency price rises and falls, all gains”. Some specific wealth management products even showed inferiority. Regarding the annualized rate of return of some liquid mining projects, how do dual-currency wealth management products like this work? Can their income really be ” no fear of currency price rises and falls “? Lianwen will analyze and discuss this.

Dual currency wealth management draws on traditional financial models

The dual-currency financial products currently launched by major CeFi institutions in the cryptocurrency field are actually a financial management form that has evolved from the traditional financial market and the current status of the crypto market.

In the traditional financial sector, dual-currency financial products basically divided into the first category is based on the principal amount of RMB as an investment, the RMB deposit interest in the product investment period should be generated into dollars, and then this other than the US dollar as the principal investment The operation mode of currency financial products is operated. The income and principal generated in USD are returned in the form of USD as the overall income of dual currency wealth management products.

The second type of investment principal consists of two currencies, including Renminbi and U.S. dollars . First, the dollar part of the funds is converted into Renminbi at the exchange rate on the day of the value date. This is used as the principal of the investment, and it will be returned in Renminbi after maturity. , And then convert the deposit interest of the RMB part of the funds that should be generated during the product investment period into U.S. dollars, and then use the U.S. dollar part of the funds as the operating mode of investing in foreign currency wealth management products. The overall return of the product after maturity Pay in U.S. dollars .

The second category of dual-currency wealth management products can be simply understood as investing in RMB, etc. as the principal investment currency plus another currency (US dollar, Australian dollar, Euro, etc.). The principal currency is invested in the country , and the other The investment currency part is invested in a foreign currency model .

The second category of products can basically be seen in major commercial banks such as HSBC, Bank of China (Hong Kong), and United Overseas Bank , and dual currency wealth management in the cryptocurrency field is closer to this model of wealth management products.

HSBC describes it in its product as “a non-principal-guaranteed structured deposit that provides opportunities for potential income by linking changes in foreign currency exchange rates, while meeting the needs of foreign currency wealth management .” Bank of China describes it as “a kind of Currency exchange rate-linked investment products. According to investment orientation and expectations of currency exchange rates, and depending on currency performance, there are opportunities to obtain higher potential returns, or to buy the linked currency at a predetermined exchange rate.”

It can be seen that from the perspective of product definition, there are two currencies and different investment periods when investing. This investment period is not only the time of deposit, but also the hidden option period . Investors need to agree on an agreed exchange rate with the bank when buying the product, which is the exercise price of the option. On the basis of the strike price of the option, there will also be a different rate, which is the price of the option.

Therefore, dual currency wealth management products are not ordinary foreign currency “dual currency deposits”, but more like a structured investment product that combines foreign exchange deposits with foreign exchange options , and at the same time has certain risks .

Dual currency wealth management products in the crypto field: “Advanced Option Financial Derivatives”

The emergence of dual-currency wealth management products in the crypto field was first launched by Singaporean financial services company Matrixport in October 2019. Subsequently, many financial service institutions, digital asset wallets and exchanges also launched such products.

The dual currency wealth management products of cryptocurrency are basically similar to the above-mentioned dual currency wealth management products of the second type of traditional financial field. The thinking of switching from foreign exchange currency to encrypted currency is similar to the combination conversion method of legal currency standard and Canadian currency standard .

Dual currency wealth management product definition: “non-guaranteed but fixed rate of return” Matrixport’s floating rate of return is clear and the fixed settlement price is compared with the pegged price. Short-term investment in crypto asset service company Hufu refers to it as “a floating return non-guaranteed currency + product The yield of the product is clear and fixed at the time of purchase, while the settlement currency is uncertain. When the product expires, the settlement currency depends on the comparison between the settlement price and the pegged price at the time of expiration.”

It can be seen from the product definition that the rules for dual currency products are more complicated, especially the ” non-guaranteed but fixed rate of return ” may make it difficult for some investors to understand this type of product for the first time, or even feel a bit “conflict”. But in essence, this uncertain combination result is actually caused by several key variables such as ” pegged price, expiry date, investment currency, settlement currency, and yield “.

To have a more thorough understanding of the influence of several key variable factors in dual currency wealth management products, it is necessary to introduce some concepts of options in the traditional financial field.

Option is also the right to choose . A financial instrument based on futures refers to the right to buy or sell a certain amount of a certain commodity at a certain price at a certain time in the future.

A similar definition can also be seen when returning to dual currency wealth management products in the encryption field. Take the ” BTCUSDT dual-currency financial management ” product as an example, analogous to the traditional financial field, from the perspective of the legal currency standard, the stable currency USDT can be regarded as the domestic currency (RMB) that is generally considered, and BTC is the foreign currency (US dollar, Euro, British pound, etc.) . In terms of currency standard, BTC is the local currency and USDT is the foreign currency.

The specific operation is to determine a pegged price on an expiry date . If the price of BTC on the expiry date is higher than the pegged price, the final return is USDT; otherwise, BTC will be received.

To put it simply, if the BTC price rises, you will eventually get more USDT, and if the price drops, you will get more BTC.

Dual currency wealth management is therefore more like an ” advanced option financial derivative “, through the risk hedging method, showing the rate of return is the final rate of return.

How do dual currency wealth management products work? Linked price, expiry date, investment currency, settlement currency, rate of return, legal currency standard (BTC purchase)

Based on the legal currency standard (BTC purchase) specific case, Investor A purchased a 15-day “BTCUSDT dual currency wealth management product” through the service platform today (September 17, 2020). As of press time, Bitcoin temporarily reported 10868 USDT, and other relevant parameters are as follows:

  • Pegged price: $11,000
  • Expiry date: October 2, 2020
  • Investment currency: 1 BTC
  • Yield: 5%
  • Settlement method 1: If the BTC/USD settlement price is lower than 11,000 US dollars, investors will get 5% BTC-denominated income, which is 1*(1+5%) BTC, which means that they will finally get 1.05 BTC .
  • Settlement method 2: If the BTC/USD settlement price is higher than or equal to 11,000 USD, the investor will get 5% USDT-denominated income, which is 111,000 (1+5%) USDT, that is, 11550 USDT .

全面解析CeFi双币理财:理财与期权结合的风险对冲方法 As the settlement price of BTC/USD will change on the expiry date, the investor will get a 5% definite return , but it is uncertain about the settlement currency.

Currency standard (USDT purchase) case

Based on the legal currency standard (USDT purchase) specific case, Investor B purchased a 15-day “BTCUSDT Dual Currency Wealth Management Product” through the service platform today (September 17, 2020). As of press time, Bitcoin temporarily reported 10868 USDT, and other relevant parameters are as follows:

  • Pegged price: $11,000
  • Expiry date: October 2, 2020
  • Investment currency: 10,000 USDT (The price is about 0.9201 BTC at the time of publication)
  • Yield: 5%
  • Settlement method 1: If the BTC/USD settlement price is higher than 11,000 USD , the investor will get 5% USDT denominated income, which is 10,000*(1+5%) USDT, that is, finally get 10500 USDT .
  • Settlement method 2: If the BTC/USD settlement price is lower than or equal to 11,000 US dollars, investors will get 5% BTC-denominated income, which is 10000/11000*(1+5%) BTC, which means that they will finally get 0.9545 BTC .

全面解析CeFi双币理财:理财与期权结合的风险对冲方法 As the settlement price of BTC/USD will change on the expiry date, the investor will get a 5% definite return, but it is uncertain about the settlement currency.

The final product settlement price of the two cases is generally based on the average of the settlement index 30 minutes before the expiry date of the investment product at 16:00 (UTC+8). The settlement index is generally the average price obtained by selecting the prices of several major exchanges of Bitcoin and removing the highest and lowest prices .

Product income has a “threshold” that exceeds the investor’s pre-judgment range of legal currency standard (BTC purchase)

Taking the above example of the legal currency standard, the ” upper threshold ” is calculated based on the agreed pegged price of 11000 * (1+5%) = 11550. Because the price at the time of investment is purchased at the price of 10868 USDT, as long as the currency price rises above the pegged price of 11,000 USD on the maturity date, it will be settled to investors at 5% of the return, and the profit of the currency price increase will be superimposed .

If the price of the currency continues to rise by more than 5%, that is, the “upper threshold” of 11550, only the 5% gain is added to the gain of the currency price increase, which is (11550-10868)/10868*100%= 6.27%.

The ” lower threshold ” is calculated based on the purchase price of 10868/(1+5%)=10350. If the price on the expiry date is lower than the pegged price of 11,000 USD, it will be settled in BTC, and investors will earn a certain amount of BTC, but if it continues to fall If it exceeds 5% , it will start to lose BTC.

全面解析CeFi双币理财:理财与期权结合的风险对冲方法

Currency-based (USDT purchase) income

Looking at the above currency standard example, the “upper threshold” is also calculated based on the agreed pegged price of 11000 * (1+5%) = 11550 .

If the currency price continues to rise by more than 5% , which is the “upper threshold” of 11550, you cannot continue to enjoy the income after the actual increase in the currency price, that is, the position has been passively closed at 11550.

The “lower threshold” is calculated based on the purchase price of 10868/(1+5%) = 10350. If the price on the expiry date is lower than the pegged price of 11,000 US dollars, it will be settled in BTC. Although the price has fallen, investors have earned more BTC, and will get a fixed rate of return of 5%.

全面解析CeFi双币理财:理财与期权结合的风险对冲方法

Due to the high volatility of BTCUSD, the price of options is also very expensive. Dual currency wealth management allows investors to obtain better yields by “selling options”.

Through the operation of the above products, it can be seen that when the price of the investment cryptocurrency rises, the fiat currency will make money , and when the cryptocurrency price falls, the currency will make money .

Product risk point fluctuation risk When the price trend of cryptocurrency meets the investor’s pre-judgment, under normal circumstances, investors can not only obtain the ” coin hoarding income ” during the same period, but also an additional option income. Of course, there is a certain depreciation of the purchased currency at this time, but the rate of return and premium income can make up for part of the depreciation of the currency.

When the price trend of the cryptocurrency far exceeds the investor’s prediction, or during the period of purchasing financial products, the cryptocurrency market has unilateral fluctuations contrary to expectations and exceeds the ” threshold ” of financial products, the greater the volatility Investors may face more losses.

Therefore, dual-currency wealth management products are suitable for investment under the condition of little market price fluctuations. If the price is between the ” upper and lower thresholds ” at maturity, it can basically ensure the maximum return.

Investors can choose according to their risk preference and pre-judgment. The higher the linked price and the shorter the agreed expiry date, the lower the product risk, but the rate of return will decrease accordingly. The lower the linked price and the longer the agreed expiry date, the greater the risk of the product, and its yield will increase accordingly.

Suitable for crowd price prediction shock market: users who hoard coins

For example, in the overall volatile market of the cryptocurrency market, investors can obtain income by purchasing dual-currency wealth management products with a suitable period, as long as the price is within the relative fluctuation range of the “upper and lower threshold” before the expiry date, regardless of the final settlement in BTC Still USDT will get higher returns.

Especially for users who are hoarding coins in the crypto industry and users who do not participate in derivatives transactions such as contracts, the volatile market cannot obtain further benefits, so choosing dual currency wealth management products will be a relatively good choice.

Falling market: bargaining users

For some investors with rich investment experience, they may have their own predictions about the future market. For example, if the cryptocurrency market is expected to be in a downward trend in the next period of time, they cannot be accurate. When judging where the bottom price is, but it is expected that the price will rise further in the future, you can perform a bottom-hunting behavior through dual currency financial management.

When the currency price drops, if you purchase a currency-based dual-currency wealth management product, because the BTC price on the expiry date is significantly lower than the pegged price, you will not only have a wealth management return rate at the time of settlement, but you will also get more bitcoins at the same currency price When the bottom rises, the currency in hand will continue to increase in value.

Rising market: take profit users

Similarly, if investors predict that the cryptocurrency market will be on the rise for a period of time in the future, and cannot accurately predict where the top price will be, but if there is a further pullback trend in the future, they can also perform a take- profit behavior through dual currency wealth management. .

When the currency price rises, if you purchase a legal currency-based dual currency wealth management product, because the BTC price on the expiry date is significantly higher than the pegged price, the settlement will be based on the “upper threshold” superimposed product yield to take profit.

Not only will there be a financial return rate, but also more bitcoins will be obtained. When the price of the currency hits the bottom , the currency in hand will continue to increase.

Long-term investor

For long-term investors, they may not care about price fluctuations in the short-term. They will wait until Bitcoin reaches a certain psychological price. Then you can choose some dual-currency wealth management products that are linked to higher prices . The currency price is difficult to reach in the short-term. This method can be used to continuously increase the amount of currency held, earn money when the price drops, and make money when the price rises.

Mature investor

Sophisticated investors or some institutional investors tend to diversify their assets. They will not only choose basic fixed-income financial products, but may also use futures contracts, currency hoarding, wealth management, etc. Combinations, and at the same time, you can choose different combinations to adapt to different expectations of market trends, thereby reducing overall risks and maximizing your own benefits.

Institutions that provide dual currency wealth management services

As options themselves are highly complex financial products, plus the option trading volume and products of the crypto market itself are in the development stage, general users are not recommended to operate, so dual currency wealth management products are not currently in the encryption field. universal. Currently , Binance Mining Pool, Hufu, Matrixport and other institutions provide dual currency wealth management services.

Matrixport Matrixport as the encryption industry launched the first dual-currency financial services company, its dual-currency financial products including Bitcoin and Ethernet encryption Square two main assets to September 21 data, the product can choose to purchase the period from 1 day From 95 days to 95 days, the highest annualized rate of return for the four major products is 113.15%, and the total average annualized rate of return is 24.67%

全面解析CeFi双币理财:理财与期权结合的风险对冲方法

It should be noted that users who purchase Matrixport dual-currency wealth management cannot redeem it in advance , nor transfer or withdraw it. Therefore, when purchasing this dual-currency wealth management product, users need to consider whether there is an urgent need for funds during the financial management period.

Hufu Hufu hoo.com Hufu dual-currency wealth management products are currently in progress, including “Dual currency wealth management-BTCUSDT-092101” and “Dual currency wealth management-BTCUSDT-092102”. The annualized rate of return is 30% and 93% . The investment amount is 0.1 BTC, and the product quota is 50 BTC.

全面解析CeFi双币理财:理财与期权结合的风险对冲方法

Hufu’s dual-currency wealth management products also carry invitation-assisted preferential activities. You can bid to invite friends to help before the end of the subscription. Friends help can increase the annualized interest rate, and you can receive up to 10 help. It is also worth noting that Hufu’s dual currency wealth management products cannot be redeemed in advance.

Binance Mining Pool Binance Mining Pool

全面解析CeFi双币理财:理财与期权结合的风险对冲方法

Binance Mining Pool’s dual-currency wealth management products were officially launched on August 20. They are mainly divided into three major product areas: BTC area, USDT area and BUSD area. However, its dual-currency wealth management products are currently sold out due to limit restrictions. The annualized rate of return provided is up to 100%.

summary

The crypto industry continues to derive new things in the development process, and investors also need to follow up and update relevant knowledge and concepts to follow up the development of the market. From the perspective of asset allocation , different trading strategies and plans can be formulated to seek the best balance between risks and benefits, and a package of investment and wealth management products can be used to achieve as much profit as possible while taking on lower risks.

The use of combined financial management such as dual currency financial management can also significantly improve the use and efficiency of funds , thereby capturing more market opportunities when there is a good profit opportunity in the market.