Good Morning, PokPok fam! 🐔 

Ready for another week of madness? We are 😉 

WHAT’S HAPPENING? ⌛️

• 👀 Celcius sues Tether for $3.4B 🚨 💰️ 
• Middle-East War Tensions Continue as US Carriers move closer 🪖 
• (13 August) US Economy: PPI MoM 🏦 
• (14 August) US Economy: Core Inflation YoY 🏦🚨 
• (15 August) US Economy: Retail Sales MoM 🏦 

Today’s Micro-Lecture: Hedging: Using Protective Puts to Save Your Portfolio from Market Crashes 📉 

Got a lecture idea? Let us know!

Coming up this week ⭐️ 

Celcius sues Tether for $3.4B 💼 💰️ 

Our conversation on Friday regarding the risks of stablecoins, particularly USDT (Tether), has come around quite fast.

• Celcius alleges Tether liquidated 57,000 BTC without proper notice to add further collateral
• Claiming that Tether violated their agreement by selling the BTC Collateral prematurely without their 10-hour notice period given within the agreement
• Tether’s Take: Confirms the lawsuit but believes it is just another “shameless litigation money grab”

Will Celcius win this legal battle? Perhaps? Perhaps not?

Celcius isn’t the most law-abiding crypto company either, given its history of pretty much converting its business into a Ponzi scheme.

However, a $3.4B lawsuit is 3% of USDT’s market cap; this is pretty huge.

Note: To be on the safe side, there is no harm in converting your USDT into other stablecoins such as USDC, USD+ etc. (perhaps ones with better yield, too?)

Middle-East War Tensions Continue 🪖 

We passed with our black swan event last Monday, but our share of uncertainty hasn’t faded just yet. 👀 

Keep in mind that regardless of the rebounds that happen in the markets, any war in the Middle East will disrupt any analysis we may make.

This doesn’t mean that if there is an escalation to war, crypto would dump significantly. At the start of the Israel/Palestine war in October 2023, we only had a ~5% dip in BTC before trending towards ATHs.

Don’t panic. Have your points of invalidation; don’t be afraid to take losses. Maintain a defensive stance on altcoin positions (for now). Make a plan and follow it.

US Economic Events this week 📊 

As the US heads for a rate cut in September, we continue to seek reports which show further bias towards rate cuts to increase the probability of faster cuts. 👀 

Due to the Japanese Carry Trade Unwinding, the increased volatility in the US could lead to:

• Uncertainty in pricing for producers, potentially affecting PPI
• Reduced consumer confidence, possibly impacting Retail Sales

(13 August) PPI MoM & (15 August) Retail Sales MoM

• What PPI MoM means: Producer Price Index (Month-over-Month) is a key economic indicator measuring the change in selling prices received by domestic producers for their output. It provides insight into inflation trends at the wholesale level and is often considered a leading indicator for consumer price changes and potential shifts in monetary policy.
• What Retail Sales MoM means: A key economic indicator measuring the total sales value at the retail level in a country from one month to the next (% change). Provides insight into consumer spending trends; Indicator of economic health and potential shifts in monetary policy.
• Prior/Forecast:
  • PPI MoM: 0.2% Prior / 0.1% Forecast
  • Retail Sales MoM: 0% Prior / 0.3% Forecast
• Bullish Thesis: Under-expected PPI and Under-expected Retail Sales indicate lower inflation and a slower economy, leading to potential crypto pumps. Confirmed = Higher % of larger cut 🚀
• Bearish Thesis: The converse would lead to a stronger economy, which goes against our bias. It may not change anything about the September rate cut but does not signal that a faster cut needs to be made. 🐻 

(August 14) Core Inflation Rate YoY

Why do we look at Core Inflation Rather than Inflation by itself?

Inflation Rate includes factors such as Food and Energy prices which can be volatile, especially during periods of uncertianty: geopolitical tensions, external events etc.

Core Inflation cuts out these kind of volatile factors, which allows for a clearer view of what the inflation is actually like.

The father of economic indicators which we seek. 🔥

• Prior/Forecast: 3.3% Prior / 3.2% Forecast
• Bullish Thesis: We’re looking for an under-expected Core Inflation Rate further approaching the Fed’s 2% target to give Powell and his friends more confidence in cutting rates. We’re expecting the Carry Trade Unwinding to have had an impact on inflation, potentially more unexpectedly, to see this better we may look at the Core Inflation MoM at the same time. 🔥 

As we approach closer to the target inflation level of 2%, there becomes less resistance to considering a rate cut.

Despite not reaching our target yet — the US economy seems weak, which leaves a rate cut entirely justified. Over the weekend, JPMorgan reveals new probabilities for a recession at 35%.

Polymarket’s Prediction Markets have been tracking this too, however, the probabilities aren’t quite as high (yet). It’s something interesting to consider though.

A Quick Strategy Update 💆 

Not much has changed since Friday, recap of our in-depth key levels here.

We have not made any changes to our strategy over the weekend.

• BTC Summary
  • Looking to hold 58.2k today after the US Open for a retest of 61.4k
  • If we fail to hold, a retrace of 56.7k will be incoming
  • We have a low target of ~54.5k this week for a retrace to the downside.
  • Given our bounce from the Daily level in the past few hours with delta coming in, we see a bounce coming in towards US Open
  • CME Gap: @ 60.9k to the upside 🚀 

• ETH
  • If BTC fails to hold its Daily level, we will be looking at a low target of 2450 over the next couple of days and 2300 for the week
  • Our high target for ETH this week is 2850

• Altcoin Exposure
  • TOTAL3 against BTC seems to be forming a bottom, starting to break the downward trend of altcoin bleeding
  • We are looking for confirmation by breaking the ~9.75M level of the previous high over the next few days.

Micro-Lecture 📝 

Hedging: Using Protective Puts to Save Your Portfolio from Market Crashes 📉 

In the wild world of crypto, volatility is the name of the game. But what if you could enjoy the upside while limiting your downside, especially during market crashes or black swan events (such as last Monday)?

What is a protective put?

A protective put is an out-of-the-money (OTM) Put Option. It’s like an insurance policy for your crypto holdings. If the price of the underlying asset goes below a certain price (strike), it gives you the right (but not the obligation) to sell your assets at that strike price, returning a profit.

The idea is to use it consistently as insurance against market crashes.

Example: Lets say you own 1 BTC @ $60k and you’re bullish long-term but worried about short-term volatility (e.g war panic).

You could buy a BTC put option with a strike of $50k, expiring in 3 months.

This gives you the right to sell your BTC on the option at $50k, no matter how low the price goes.

Benefits

• Limits potential losses
• POTENTIAL PROFITS FROM CRASHES
• Peace of mind against market crashes

Neutralising your Delta

Calls are long delta. Puts are short delta.

Buying crypto is the same as having a long position and is often called a "long delta” (benefitting from price increases). Conversely, selling/shorting crypto is a “short delta” (benefitting from price decreases).

A protective put neutralises your delta below your strike price. This means you will be less affected by downward pressure below the strike.

However, as put options are cheaper the lower you go (but also less likely to expire in the money), you could buy more put options at a lower strike for the same price which may allow you to have a negative delta.

What does this negative delta mean?

It means, that if there’s a market crash and price goes below price X, you will be effectively “short” the market, and benefit from a further crash. 👀 

However, if you had 1 BTC and had 1 Put Option, you would only be delta neutral (almost) after a certain price, which would only limit your losses rather than return profits.

Mark Spitznagel’s Universa Investments made a 4144% return during the COVID-19 crash using Protective Puts on the S&P500. Read up on this here. 🔥

Example Hedge

We allocate ~3% of our portfolio to hedging, but you can experiment with this, especially if you have the cash flow to cover the premiums.

For example:

1. Buy 1 BTC @ 59,000

2. Buy 2.75 Put Options @ 45,000 expiring 27 September 2024 (3% allocation) (premium: 645/put)

If we did that with a 3% allocation, we would get this payoff chart at expiry:

The reason we say at expiry is because there is a payoff curve which narrows as the option is priced differently over time (based on time, volatility, interest rate etc.)

The faster the move happens, the better return you will make.

If we were to instead allocate let’s say 5% of our portfolio to the put option, we would get something like this:

• Closer breakeven to the downside
• Higher returns

Costs and Considerations

• You pay a premium to buy a put. The further out of the money (lower strike), the cheaper it is.
• Expiry Date: Your option loses “time value” up to its expiry date. Depending on how imminent you see volatility coming, you may adjust this date
• Maximum Loss: Cost of Put Options + Difference between Put Strike and BTC Underlying Entry Price

We recommend an expiry date of 2-3 months.

Mark Spitznagel, a hedge fund manager specialising in Put Hedges said that if you need to make extensive analysis/predictions when setting up your hedges, it isn’t a hedge anymore, it’s just a trade.

Therefore, don’t micromanage hedges. They are insurance. You don’t micromanage your car insurance 😆 

Considering non-BTC portfolios

The majority of our portfolios are not in BTC, let’s be honest (for most of us).

How can we hedge an altcoin or DeFi portfolio? There are no options for 99.99% of assets out there, right?

We can still use BTC puts as a hedge, however, we must understand the correlation and relative change in those altcoins to BTC, also known as “relative delta”.

There isn’t any way to precisely calculate this, however, you can look at the average % change of an asset, let’s say AVAX, for the change in BTC’s price.

First, we check if AVAX is correlated with BTC (it is). 👍️ 

Then, we look at AVAX/BTC to see the relative performance

We can look at many different price points, however, if we were to do a 2-3 month hedge, let’s look at the past 3 months.

36% underperformance compared to BTC.

In this case, we may look to buy ~36% more puts on BTC to hedge against our AVAX.

How would we do this for a multi-coin portfolio?

This is where it gets a little more complex, however, we’d be keen on knowing if you want an in-depth guide on this, or perhaps a tool to support you with this!

Would you like an extended hedging guide OR web tool for DeFi/Altcoin portfolios?

Extended Guide Web Tool Both Neither

Key idea for a multi-coin portfolio: We would have to find relative performance to BTC for all the assets in your portfolio and weight them based on their value

Thanks for reading today’s publication! We crave your feedback — got any suggestions or questions for us?

Get in touch with at contact@tagoresearch.com or pop us a message on X at @tagoresearch.

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Disclaimer: The PokPok Pulse newsletter and any curated information provided by Tago Research are not intended as Financial Advice but as educational content for insights into the crypto market. Only invest what you can afford to lose. We are not liable for any losses incurred.