Stoic Team to Launch a Market Neutral Strategy

The crypto market is volatile. In fact, it’s one of the most known characteristics of the space, allowing many to cash out in a big way. However, some people are not ready to take a risk and would prefer to acquire stable earnings over time. How do you choose the right earning strategy? Let's take a look.

Returns vs risk

Low risk corresponds with low returns and vice versa. Depending on your personality, you can choose risk-averse or risk-taking strategies. The former is much less nerve-wracking than the latter, yet it can’t deliver as big a result. However, risk aversion has its perks – you receive 5-20% APY on your money without massive swings in either direction. Here are some examples of high and low risk earnings.

Stablecoin lending

Pegged to the USD, these tokens are of equal value to US legal tender, making it a low-risk earning tool in the crypto world. Lending protocols and stablecoins themselves remain riskier than bank savings accounts. Yet, the former delivers on average 5% APY, while the latter can offer around 0.06% APY.

Binance Earn

Binance Earn can possess both high and low risks depending on the assets. If the market is experiencing a downfall, you risk losing the fiat value of your crypto funds apart from stablecoins that remain pegged to a fiat currency. APY for crypto assets can reach 120%, while for stablecoins stand at around 10% for deposits under $2k, 3% for deposits in between $3-75k, and 1% for deposits over $75k.

Luna

Luna’s UST has been promoted with 20% APR and low risk. However, as it became evident recently, a model such as theirs can lead to a massive downfall. After a tremendous UST de-peg, Luna lost 99% of its value, falling from $80 to $0.00142 in a matter of days.

What happens if the market falls?

If the market is in a downward spiral, you could experience a loss unless you employ a hedging mechanism.

Hedging is a strategy that protects your funds from value loss. It is commonly executed through shorting, where some of the assets remain intact, and others take advantage of the market downfall.

Financial markets have a long history of using hedging. In fact, stock exchanges gave birth to hedge funds. Yet, not everyone earns on such funds due to a high entry barrier. For example, in order to invest in Vanguard VMNIX, you must have at least $5 million in upfront capital. However, you can employ hedging tactics like shorting the crypto futures market utilizing a Market Neutral Strategy.

What are Futures?

Futures are contracts that fix the price for the buyer and seller. Imagine you want to buy 1 ETH worth $3,000 as you expect the price to reach $4,000. If you are not ready to spend right now, you can make a contract with an obligation to pay $4000 to the seller by the end of term. That is futures in a nutshell.

Hedging with futures  

Why hedge if you can just manually sell crypto assets and buy them back after the correction? A couple reasons could be:

• Downward movement affects all assets in a portfolio. Therefore, it is better to open a short position to secure your funds.
  
• Normally, futures are a bit more expensive than spot assets. As the date of the futures contract nears the gap closes, giving the investor an additional profit.

For example, while holding a long position in ETH, user may open a short position in a Futures contract. In case of a correction they will profit on futures, acquiring compensation for the loss on a market decline.

Market Neutral Strategy works in a similar way. Our algorithm automatically buys spot assets and shorts them on futures over and over again. That way, we secure earnings via the funding fee, and maintain a perfect balance.

We make return predictions based on data over the past few months. The forecast of negative funding fees prompts us to remove contracts from the portfolio and allocate capital to contracts with positive funding fees.

If the market is too volatile and funding fees are highly negative, we will exit all positions, thus saving the capital.

How Market Neutral Strategy works

Stoic AI's first Market Neutral Strategy is called Fixed Income. The perks are as follows:

• No lock-up: You can withdraw funds at any time with the accumulated interest.
• Your funds remain in your Binance account.
• No need to transfer funds to a third-party exchange if you don't want to.
• No portfolio size limits: Earn the same return with $1000 or $1M.
• Offers up to 15% APY
• Little-to-no exposure to USDT (as it uses USDT only for trading and portfolio rebalancing, so 99% of the time it has no exposure to USDT), and has no exposure on other stablecoins at all. The funds stay in USD via USD futures pairs on Binance.                            

Fixed Income strategy was specifically developed for risk-averse users. It is necessary for Binance and other exchanges to keep spot and futures prices about the same. The exchange achieves this by stimulating the flow of liquidity into the futures market utilizing a funding fee. The funding fee is a commission paid out to futures sellers every 8 hours. The interval is determined by Binance.

In theory, anyone can utilize this earning mechanism by opening long and short futures positions, thus getting a funding fee. However, if you are not careful, you can lose track of your positions and endure a loss. To avoid it, you can use automated solutions that can look after your trades and execute an action right on time.

By the rules of investment theory, it's best to have a portfolio consisting of several assets rather than just one. BTC is still king and decides the crypto market's course. Yet, some assets grow and fall faster than Bitcoin, possessing better opportunities to acquire funding fees. Thus, by having a balanced portfolio, you can receive stable returns.

That is what Fixed Income strategy offers. It is an automated solution possessing a balanced portfolio with the capability to act when the market demands it.