Macro:

1)Introduce longer racing periods, based on the structures’ of a Yield Curve and the Black Scholes Option model.

2)Implement crypto indexes, enhancing the ability to hedge, and allowing for more ‘competitive’ betting pairs.

Introduction

Volatility can be a traders best friend, and can provide outsized returns given proper positioning. Nevertheless, tenured traders utilize a variety of market tools and innovations to best manage volatility. Having ‘naked’ exposure to a security occurs when the holder is fully exposed to price swings, this leaves the investor’s portfolio susceptible to daily major P/L fluctuations and can cause sleepless nights.

Moreover, the willingness to be ‘naked’, is often inverse to the securities volatility(i.e. the less volatile an asset, less need to hedge). True to the above, a sophisticated trader/fund yearns for a ‘hedging/de-risking’ tool to manage positions in asset classes that are susceptible to volatility. In the traditional equities market systematic risk or volatility is defined by beta, and traders often measure a holdings volatility to that of the market.

A stock with a beta of 1 implies the stock has the risk/volatility of the overall market, a stock with a beta greater than 1 implies the stock is riskier than the overall market(beta less than 1= less risky than market). As investors in the crypto space we understand volatility and the effect it has on returns to both the up and downsides.

Further, the crypto space is new, exciting, revolutionary, and to Ethorse’s advantage, is greatly inefficient(i.e. kimchi premium). Importantly, if a beta of 1 represented the volatility of Bitcoin, imagine the betas’ of the other 1,300 crypto assets. Basically the above demonstrates the value of the Ethorse protocol, a platform for all market participants to de-risk their holdings and better manage their portfolio.

Price Action of BTC in the Past Year

BTC has fallen about (42%) in a month period from it’s all time high in December of 2017. During the 2008 Financial Crisis the S&P 500 fell (37%). Nevertheless, in the past 2 years BTC has appreciated about 26x, simply awesome for ‘hodlers’ of Bitcoin and simultaneously quite worrisome for newbies in the space. The above demonstrates both the advantages and disadvantages of volatility, immense fortunes can be made and lost within an unfathomably short period of time.

I am not here to argue whether BTC is a good investment at these price points, I believe valid and logical arguments can be made for both sides of the trade. Objectively, the crypto market place must develop to allow all current/future participants to voice their views through trades, whether claiming FUD or not, an efficient market is inherently a collection of differing views.

Implementation

Ethorse’s beta included a 24 hr racing period, and longer racing periods will be included in their mainnet launch(48 hours, 72 hours, and weekly). Using the traditional options market as a foundation, implementing longer racing periods will attract investors with longer term investment horizons. In the traditional options market the longest duration contracts are usually up to 9 months, with shorter contracts having durations of 1 week, 1 month, 3 months, and 6 months. Moreover, investors can utilize LEAPS, which are options that have an expiration of up to 3 years, as some participants desire longer term contracts based on their investment horizon.

The traditional options market has evolved to satisfy the needs of their participants, rather than cater to a select group of investors(i.e. short term traders) . In order for Ethorse to satisfy the appetites of an array of participants it will need to have racing periods greater than 1 week. The current participants of the protocol, and investors in HORSE do not represent the ‘market’ in its entirety. When voting on protocol changes(i.e. racing periods) HORSE token holders must think of what different participants would want included in the protocol.

In my ‘Ethorse Analysis’ Medium post, I decided that the long term value of HORSE will occur through its use in governance, protocol changes, and fee structure changes (i.e. takeout rate). For this to occur early adopters must be open minded to the features that future participants will want, this will create a constant flow of forward looking adaptation(changes) that will drive the value of HORSE.

Longer Racing Periods

HORSE token holders receive their dividend(i.e. takeout) every quarter, and the protocol plans to distribute the payout monthly. Implementing a monthly payout rate inhibits the racing period length, and while allowing HORSE ‘hodlers’ to receive monthly dividends creates a steadier and more constant ‘stream of cash flows’, an additional feature/protocol change should be implemented.

As argued above, longer racing periods have the potential to attract a larger array of participants. Moreover, I believe a longer racing period should be synonymous with a larger payout rate, think about the relationship between yield and duration with bonds, and the ‘time-value’ component of the Black Scholes Option pricing model.

Basically a longer duration results in a lower price and a higher interest rate in a bond, and a larger premium in an options contract(i.e. generally a 3 month call option contract of the same security, with the same strike price, trades at a discount to the 9 month contract). This thought basis should be applied to the Ethorse protocol, and will result in both an ability to attract a larger array of market participants through proper incentivization of HORSE ‘hodlers’. For example, racing periods beyond a month will include larger takeout rates distributed to token holders(more than 5%, and voted upon). This will satisfy the needs of longer term holders who are looking for longer racing periods, and properly incentivize HORSE holders who will receive a larger cut.

Indexing(‘Oralize’)

As the crypto space has evolved, different crypto asset classes have formed. Ark Investment Management defines these as: 1) cryptocurrencies, means of exchanges(Bitcoin, Litecoin, Monero, Zcash), 2) cryptocommodites, cloud storage, bandwidths, compute cycles(Ether, Filecoin, Golem), and 3) cryptotokens, consumers facing DApps(Augur, Aragon, Steemit). These 3 defined asset classes will each make up an individual index, and a variety of trading pairs will occur. Most importantly newly minted alt-coins, which are highly speculative, and illiquid will be traded against their respective index. Since their success is often binary(to 0 or to the moon) a parimutuel betting will be best suited.

Ethorse should incorporate these 3 crypto asset classes, defined above, into their protocol. Furthermore, this will create a hedging strategy which allows participants to both hedge out their positions and use leverage to magnify returns. In addition to these 3 crypto asset classes, the protocol should implement an index of the entire space(see CoVenture Crypto Index).

If you are bullish on Litecoin and hold a ‘naked’ position in the currency, you can hedge that position by betting that Litecoin will have a smaller price appreciation against either the specific cryptocurrency index, or against the CoVenture Crypto Index. Allowing an investor to be bullish on a crypto while using the tools of hedging and leverage. Remember that a ‘short/repo’ market for cryptos has yet to be developed, and a traditional futures market has only been made for BTC.

Furthermore, the current CBOE Bitcoin Future contract requires an initial margin of 44% of the contract value(i.e. purchase a contract on margin for $6,600 if BTC is trading at $15,000),compared to an average initial margin between 5 to 15% for typical commodity futures. The higher initial margin requirement for BTC futures is derived mainly from the volatility of BTC. Lastly, this shows that typical ‘Wall Street’ innovation and trading tools are not best suited for the crypto space in their pure, as is form.

Conclusion

Ethorse in its current form satisfies only part of what is needed in the crypto market. HORSE holders must constantly challenge the protocol, and forecast the ‘wants’ of future participants. I believe Ethorse should implement: 1) long racing periods, implementing a yield curve, and thus enlarging their total addressable market (TAM), and 2) the indexing of crypto asset classes, allowing for a betting platform to hedge and magnify returns.

ETH: 0x49515a8BFa4b489E557C0F207589072cd03D4007