XTZ Instruments on CEXs Are Not Worth it

XTZ Instruments on CEXs Are Not Worth it

Disclaimer: This material is not investment advice or trading advice. Tezos Ukraine is not responsible for your investment decisions. Don't invest more than you can afford to lose.

DeFi projects on Tezos provide many instruments: swaps, farming, arbitrage, liquidity providing, loans, and derivative strategies with profit compounding. But for advanced instruments like options, you have to go to centralized exchanges.

We have tried to find XTZ instruments that in theory should be more profitable or less risky than DeFi. But it looks like there is not a sensible offer in sight: it’s either low returns or the risk of losing everything. Spoiler: it is better to earn in DeFi and think less about CEX.

Is Trading XTZ at CEX a Good Idea?

To trade any cryptocurrency or financial asset, you need to consider its volatility, i.e. the measure of price change over a period of time. If an instrument is too volatile, it will be difficult to predict price changes and calculate risks. If the instrument is not sufficiently volatile, trading with it will be unprofitable.

We have used the Average True Range in Percent (ATR%) indicator to determine the volatility. It shows how much the price changes during the selected period, or, more precisely, the average difference between the maximum and the minimum price of the asset for the selected period in percent.

For Tezos the ATR% for the last 30 days is 6.737%, that is, the price changes by an average of 6.7% per day.

For other cryptocurrencies, ATR% comprises:

  • Bitcoin – 4.37%;
  • MANA – 6.03%;
  • Ethereum – 7.06%;
  • Monero – 9.28%.

In general, the volatility of XTZ is somewhere between BTC and ETH. It is enough for margin and futures trading.

Savings Account

A savings account is a floating-term deposit, meaning the user can deposit or withdraw tokens at any time. The yield on Binance is 2% – 2.5 times less than the yield from delegating, with XTZ having to be deposited on the exchange. Delegating is definitely the winner here.

Trading Bots

Bots trade selected assets according to a pre-programmed strategy. They can be divided into two types:

  • Standard: the user chooses one of the pre-programmed strategies;
  • Custom: the user programs the bot to trade on the indicator readings.

The exchange Gate.io supports both kinds of bots and XTZ trading. So here’s what you can do there:

  • write a strategy using mathematical functions like “Buy 100 XTZ if the trading volume from 6 to 8 am exceeds the square root of the volume of the first 20 order book levels”;
  • Strategize with indicators, like “Buy when RSI(14) is below 25”;
  • Choose one of the classic bots to trade a grid of orders, the gradual accumulation of XTZ, or arbitrage between the spot and perpetual futures.

The trading bots at Gate.io support testing with historical data, so you can use them to practice your strategies or take your idea out for a spin.

One of the traders has already made a strategy for the XTZ/USDT spot market with an 11% APR, so the bots are actually helpful.

BULL&BEAR Tokens

BULL and BEAR tokens, also known as leveraged tokens are unique in the fact that their price changes several times more than the price of the underlying asset. Most often exchanges launch BULL and BEAR tokens with leverage of x3, so the price changes 3 times as much.

For example, if the price of XTZ goes up by 10% tomorrow, the price of XTZBULL goes up by 30%.

The upper chart represents the XTZ/USD spot market, and the lower, the XTZBULLUSD spot at FTX.

On July 18, XTZ rose from $1.57 to $1.74, i.e. up 10.8%. At the same time, XTZBULLUSD rose from 0.00004044 to 0.00005550, up 37%.

Exchanges conceived BULL and BEAR tokens as technically safe instruments with leverage: they can be withdrawn to an external wallet and HEDL (sorry) like regular tokens. But because of the volatility and the rebalancing mechanism, the prices of leveraged tokens have fallen dramatically. For example, BTCBULL costs just $142.

A Lending for Margin Trading

Margin trading involves buying or selling assets with borrowed funds. Roughly speaking, the user borrows XTZ and then opens a position with leverage with them. They undertake to close the transaction and return the borrowed funds with interest. In the case of a loss, the exchange can forcibly liquidate their position if there is a risk that the trader’s personal funds are not enough to cover the losses and the lender will go into deficit.

Trading on margin is risky. But XTZ holders can lend them to traders and earn interest on the loans. For example, at Gate.io you can lend XTZ at 3.65% per annum (0.01% per day), and at KuCoin at 8% per annum (0.022% per day).

That said, your profits from margin trading fully depend on the traders’ demand for your asset.

Conclusions

Personally, we expected centralized exchanges to offer profitable and cool trading instruments. But it turns out that Savings Accounts have half the yield of what delegating can bring about, and margin loans have unpredictable yields. You need trading experience to make money with trading bots. BULL&BEAR is more down than up.

Our conclusion is that, well, you’d better off delegating XTZ or buying ctez with them than trying to earn 10% per annum on CEX with the substantial risk of losing everything.

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