Research Summary
The report discusses a strategy for earning passive income in the crypto market by being delta neutral. It explains the process of going long on Ethereum (ETH) while simultaneously shorting ETH on a perpetual contract (perp), thus maintaining a delta-neutral position. The report also highlights the potential risks and challenges associated with this strategy.
Key Takeaways
Understanding Delta Neutral Strategy
- Delta Neutral Strategy: The report explains a strategy of earning passive income by being delta neutral in the crypto market. This involves going long on a cryptocurrency, such as Ethereum, while simultaneously shorting the same amount on a perpetual contract. This ensures that regardless of the price fluctuation of the cryptocurrency, the investor neither loses nor gains money.
Income Generation
- Income Generation: The report suggests that the income from this strategy comes from the staking yield of the cryptocurrency and the funding rate on the perpetual contract. The funding rate is the mechanism that ensures the last traded price is always anchored to the global spot price. It is similar to the interest cost of holding a position in spot margin trading.
Risks and Challenges
- Risks and Challenges: The report highlights several risks and challenges associated with this strategy. These include the difficulty of opening and closing long and short positions simultaneously, the fees for opening and closing positions, the need for rebalancing if the market becomes skewed, the risk of liquidation, and the risk of changes in the funding rate.
Example with Ethereum
- Example with Ethereum: The report provides an example of how this strategy could be implemented with Ethereum. It suggests buying staked Ethereum (stETH) and shorting the same amount on a perpetual contract. The report calculates the potential daily yield from this strategy, taking into account the staking yield and the funding rate.
Alternative Strategies
- Alternative Strategies: The report suggests that option trading might be an easier and potentially more profitable strategy. It also suggests that this delta neutral strategy could be used as a way to earn income during a market downturn or when an investor wants a break from the market.
Actionable Insights
- Consider Delta Neutral Strategy: Investors interested in earning passive income from the crypto market might consider implementing a delta neutral strategy. This involves going long on a cryptocurrency while simultaneously shorting the same amount on a perpetual contract.
- Understand the Risks: Before implementing this strategy, investors should understand the associated risks and challenges. These include the difficulty of opening and closing positions simultaneously, the need for rebalancing, the risk of liquidation, and the risk of changes in the funding rate.
- Explore Alternative Strategies: Investors might also consider exploring alternative strategies, such as option trading, which might be easier and potentially more profitable.
