The cure for HODL

December 11, 2018  |  
Oscar Loudon

A Case for Security Tokens as On-Chain Crypto Derivatives

Investment psychology is made up of a few different camps, each with their own merit. There are Bulls and there are Bears. Those in the bullish camp tend to buy and hold, those in the bear camp tend to stay away or short sell. During typical market cycles, both the bulls and the bears tend to make money at seperate times, and generally the people who are in the game for the long haul tend to make the most profit. These are the financial institutions.

The crypto-world seemed to yield a third type of person. The HODLer emerged amidst some of the most insane market bubbles in recent history.

Holding on for dear life

Why do we HODL?

For the uninitiated, HODL stands for Holding On for Dear Life. While bullish and bearish investors seem to act on principal, the HODLer was simply in it for the ride. We all knew that Cryptocurrency was in a bubble, and when the wheels fell off the amount of respect we had for the investor that was HODLing was immense.

HODL comes around because of the centralised risk surrounding cryptocurrency. Holding Ethereum is great for a time,

Why do we love the HODLer?

For the uninitiated, HODL stands for Holding On for Dear Life. While bullish and bearish investors seem to act on principal, the HODLer was simply in it for the ride. We all knew that Cryptocurrency was in a bubble, and when the wheels fell off the amount of respect we had for the investor that was HODLing was immense.

People wore and continue to wear the term HODL with a badge of honour.

The truth is HODL is not a badge of honour. HODL is the crypto version of the buddhist philosophy “pain is an illusion”. Cryptocurrency losses are very real, and HODL is terrifying, so why do we do it?

We love HODL because it’s all we have

That’s the saddest part about the Cryptocurrency world. There isn’t an alternative for HODL.

HODL is not healthy

The often repeated joke on Reddit is that whenever there is a large scale crypto-crash is to post the U.S. Suicide hotline. Holding on for dear life doesn’t do anything for your mental health, so why do we think it’s necessary.

Stablecoins suck

For a while during 2018, it seemed like Stablecoins were going to be the solution to HODL. Stablecoins presented their users with what seemed to be a valid solution; Tether the value of cryptocurrency to a fiat currency, or some other commodity.

We all know what the most famous example of this type of product is. Tether’s controversies continue, and many other Stablecoins haven’t fared much better in the ICO crash. Many of their value generation mechanisms rely on scarcity, or some other theoretical mechanism to generate some form of stability. I’m just going to come out and say it, Stablecoins don’t work. Relying on Stablecoins for stability is like relying on stimulants to get you off depressants.

Fundamentally Stablecoins don’t work, because they rely heavily on deriving their value from a liquid asset. These liquid assets themselves fluctuate heavily, resulting in not only a lack of stability, but a lack of a use case for their existence. What good is a Stablecoin that doesn’t provide any stability to a violently fluctuating cryptocurrency.

We need a cure For HODL

Cryptocurrency investors are still people. They have livelihoods that run with the markets. When pandemonium takes over and the price of cryptocurrency begins to exceed its underlying value, HODL seems like fun. It’s this excitement that drives us to pursue ever increasing highs. It might be fun, but HODL is a hell of a drug.

Stablecoins don’t prevent HODL. In fact it is their inherent failure as a system that only adds instability fuel to the fire of crypto-markets.

How can we prevent HODL? How can we become so hooked to the movements of crypto-markets that our very livelihoods are affected by this?

In order to cure HODL, and the types of behaviour that permeates through the cryptocurrency community, we need to look at HODL a bit differently. The main reason people HODL, is because they don’t have any alternative. For the main cryptocurrencies, such as Bitcoin and Ethereum, there is nothing to hedge against. If the crypto-markets go down, the only option most investors have is to sell out of their holdings into cash.

Call me crazy, but I think I this is the answer. It’s a long shot, but it could be the answer. Hear me out.

A case for on-chain Crypto Derivatives

A[1] derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset (like a security) or set of assets (like an index). Common underlying instruments include bonds, commodities, currencies, interest rates, market indexes and stocks.

Consider the value of an on-chain cryptoderivative, which operates at a completely independent value compared to Ethereum. If a trader believed that the price of Ethereum was about to drop, that trader would purchase derivates in a given asset, and then wait for the price of Ethereum to drop. If Ethereum did in fact drop, they would sell their squares and then buy back in to Ethereum, thus earning more Ethereum for the same relative value for squares. If Ethereum was then to rise, the derivative holder could then convert their Ethereum to fiat currency, thus realising a profit.

Let’s use the example that Ethereum is trading at $200 USD. A trader buys squares from the example above, with 1 Ethereum ($200, or 0.1% of the total asset value).. Ethereum drops in price to $150AUD. The trader can then buy more Ethereum for the same amount of money. They now own 1.25 Ethereum.

Ethereum rises up to $200AUD. The trader now has 1.25 Ethereum at $200AUD, earning a total profit of $50.

Why the need for on-chain? On-chain removes the need to have a custodian, which is the single biggest issue with creating financial instruments such as derivatives. By leaving the transactions on-chain, these derivatives can be viewed publicly i.e. in full view of regulators. I’d argue that being on chain would make it much harder to manipulate the market, and being harder to manipulate, it would stifle the presence of the large financial institutions.

Ok, so you’re probably wondering by now, if Crypto Derivatives are going to be the answer, what do we use to secure them.

Ladies and Gentlemen, the answer is:

Security tokens are the solution to the On-chain Crypto derivative we need

Imagine this., imagine that I own Ethereum. I’m scared of my Ethereum losing value, so I use part of my Ethereum to buy a Crypto derivative. The derivative itself represents something neither inherently stable, nor something that violently fluctuates. The derivative is backed by something that is undervalued. That’s how I know my portfolio value is safe.

The Crypto game isn’t about winning. It’s about not losing. 

This is how we don’t lose.

Oscar Loudon

Oscar Loudon runs the startup AssetSquared. Cryptocurrency was made for crowdfunding. We make it possible. Buy, sell and trade digital assets using the AssetSquared platform. Find out more at AssetSquared.io

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