OKEx Investment Portfolio Strategy Under the Unified Trading Account

1. Market Background

In 2020, the global economy was in recession due to the impact of COVID-19. In response to the impact of the epidemic, governments have carried out unprecedented liquidity release and central bank expansion. Digital assets represented by Bitcoin under the macro background of lower interest rates and loose liquidity, enjoy a very high valuation premium. In the beginning of 2021, digital assets represented by Bitcoin have also achieved surprising growth. The spot price of Bitcoin has risen from US$30,000 to US$60,000; the spot price of Ethereum has risen from US$900 to US$2,100. As the global economy began to recover gradually after the epidemic was brought under control, the rise in real interest rates brought certain uncertainty to the anchoring of the value of financial assets. Digital assets seemed to take some time to digest the pressure of valuation, and certain changes in the bull market appeared.

Bitcoin and Ethereum have both experienced a certain consolidation recently, source: tokeninsight.com

Entering the second quarter of 2021, the spot prices of Bitcoin and Ethereum seem to have encountered certain resistance. The scale of the digital asset derivatives market has not grown as rapidly as in the fourth quarter of 2020. In April 2021, the spot price of Bitcoin showed a trend of flattening. The characteristics of the bitcoin derivatives market also confirm this view. Open interest is at a high level, trading volume is gradually shrinking, and most investors are in a wait-and-see situation. In the volatile market, investors should put forward higher requirements for the risk-return ratio of investment strategies. Although we all know that the direction of changes in the future price of digital assets is difficult to predict, this does not mean that we cannot respond to changes in the market. If investors can establish an investment strategy that conforms to the direction of the market, they can avoid price risks to a certain extent and achieve increased returns.

Investment strategies in different market environments, source: TokenInsight.com

2. Digital Asset Investment Strategy

The digital asset market has gradually matured, and the digital asset derivatives market represented by futures and options has a corresponding scale. Investors can establish a variety of investment strategies to hedge market risks. If the price difference between the derivatives market and the spot market is used to construct a portfolio to obtain spreads, stable returns can be obtained without exposing risk exposure. In a volatile market, a stable investment strategy is very attractive.

The spread of the quarterly delivery contract between the Bitcoin U standard and the currency standard, source: OKEx

The construction of an investment portfolio requires the cooperation of different types of derivatives. A comprehensive margin mechanism can help investors improve the efficiency of funds while holding the same portfolio position. OKEx launched a unified trading account in December 2020, and its cross-currency margin mechanism can realize the full use of funds, offsetting the profit and loss of positions, and margin sharing;

• Under OKEx's cross-currency margin mechanism, all digital assets in a user's account can be converted into a margin by the U.S. dollar coefficient;
• The account value will be determined by the US dollar value of the overall position. The unified trading account can offset the profit and loss of long and short positions, and the margin is calculated together.

Since all digital assets of users can be used as margin, and the scale of superimposed margin is calculated according to the overall value of the account, the efficiency of user funds utilization will be released, which is conducive to enhancing portfolio income. This article will take OKEx's unified account as an example to introduce investors to related digital asset investment strategies.

OKEx Unified Trading Account, Source: TokenInsight.com

2.1 Perpetual contract and delivery contract arbitrage strategy

Futures arbitrage strategy: Under the cross-currency margin model of the OKEx unified trading account, in order to increase the leverage level, investors can use Bitcoin perpetual contracts instead of spot, and obtain futures-spots spreads benefits by holding perpetual contracts and selling delivery contracts.

Investment strategy: When the spread between the perpetual contract and the delivery contract is significantly widened, investors can "trading rich", hold the perpetual contract, sell the delivery contract, and obtain the futures-spots rate difference.

Bitcoin delivery/perpetual contract arbitrage strategy, source: TokenInsight.com, OKEx

Investment logic: The cash arbitrage strategy can help obtain the price difference between the perpetual contract and the delivery contract. Compared with the sub-account model, under the margin mechanism of the OKEx unified account, the margins of different product accounts can be combined and calculated, and holding high-leverage reverse positions (buying perpetual contracts, selling delivery contracts) can achieve profit and loss. Investors can increase the leverage level of their investment portfolio without exposing their risk exposure, and enhance the profitability of their investment strategies.

Comparison of the model of unified trading account and sub-account, source: TokenInsight.com

However, it is worth noting that such an investment strategy is not completely risk-free. Perpetual contracts need to pay the funding rate regularly in accordance with the rules of the platform. Therefore, when investing, investors must consider the cost of fund holding a perpetual contract.

2.2 Covered Option Strategy

Covered options strategy is widely used in equity and commodity markets. Digital asset investors can also use delivery contracts and options to construct covered options strategies to increase portfolio returns.

Investment strategy: When the market volatility is high, hold delivery contracts, sell short-term options, and earn option premiums.

Bitcoin covered options strategy, source: TokenInsight.com

Investment logic: Since the OKEx unified trading account can achieve profit and loss offset, the margin is combined and calculated. Therefore, as long as the position matching (Delta hedging) is done well, the risk exposure of the market can be avoided. According to the option pricing formula, holding delivery futures means holding a unit of call option, so investors can sell the call option to determine the return in advance while holding the recent delivery contract. However, in the sub-account model, since the profit and loss of positions cannot be calculated together, investors who want to increase the leverage of the portfolio have to bear more risks.

Comparison of the model of unified trading account and sub-account, source: TokenInsight.com

It is worth noting that the covered option strategy is not an arbitrage strategy without exposure. The investment portfolio still bears the risk of falling spot prices. Therefore, investors need to judge the market environment by themselves when implementing the strategy. From the perspective of the risk-return ratio, selling call options means that the portfolio has given up possible excess returns. Investors also need to measure whether it is worthwhile to sell call options.

2.3 U standard and currency standard contracts arbitrage strategy

Large digital asset exchanges will launch digital asset derivatives based on U standard contracts and currency standard contracts for Bitcoin. In different market environments, there may be a certain spread between these two contracts. The price difference between the two can be used for arbitrage.

Investment strategy: Investors sell premium contracts and buy discount contracts to earn contract spreads;

The arbitrage strategy of Bitcoin delivery contracts in different currencies, source: TokenInsight.com, OKEx

Investment logic: The difference between U standard contracts and currency standard contracts is that the settlement currency is different. U standard contracts are settled in U.S. dollars, and currency standard contracts are settled in Bitcoin. But fundamentally speaking, both are derivative products priced in Bitcoin. Therefore, when delivery is due, the prices of the two contracts will definitely converge. When there is a certain spread between two contracts, the spread between the two can be used for arbitrage. Because the OKEx unified trading account can achieve profit and loss, investors can hold two-way contracts in the account without exposing risk exposure, and wait for the return of contract spreads to realize profits. In the sub-account mode, the high leverage arbitrage strategy will bear a lot of risk. If the price fluctuates so that one party's position is forced to liquidate, then the investment strategy will not be able to continue to be executed.

Comparison of the model of unified trading account and sub-account, source: TokenInsight.com

Conclusion

In practical applications, the construction of the portfolio should be combined with investors' own judgments on the market. Investment portfolios can indeed help us better hedge risks and obtain returns, but in actual transactions, portfolio profits will be affected by transaction slippage, funding rates, and service charges. We would like to remind investors that they should set leverage based on their actual risk tolerance, combined with the exchange’s risk control mechanism, set up stop-profit and stop-loss in advance to avoid unnecessary losses.