Risk Free Opportunities with Hard Forks and Airdrops
Special situations like dividends, acquisitions, spin offs are very common in traditional financial markets. These events are keenly tracked by analysts, traders and investorsalike. There are types of hedge funds that invest only in special situations. There are similar opportunities in crypto space. However, these events don’t draw so much attention to the crypto community. Hard Forks and airdrops provide such risk free opportunities which often tend to get ignored by many in the market.
What is a Hard Fork?
A hard fork is similar to a spin off with respect to the equity markets. One block chain gets split into two or more block chains because of differences of opinion amongst the community members. Depending upon the support of the community members, one of the newly forked chains may die out or both blockchains may continue to grow independently. A very recent example is Bitcoin Cash (BCH) splitting into BCHN and BCHA. Earlier in 2017 as well, the Bitcoin (BTC) chain got split into BTC and BCH.
Trading the Hard Fork events
Trading forking events in crypto may provide good risk reward opportunities in a short span of time. The general trading strategy is to buy the original chain coin before the event snapshot and shorting the perpetual/fixed- expiry futures simultaneously. Long position in the coin turns into two coins after the split and the short position in the perpetual hedges against any potential loss in market value of the original coin. As a result, a trader gets a dividend of the newly forked chain coin. As long as the value of the new coin is greater than the funding costs, it will result in profits. The trading schema is illustrated below for the recent split of Bitcoin Cash:
Before the fork:
Long BCH spot at 250 USDT, Short BCH perpetual at 250 USDT
USDT Required for 100 BCH + short position = 250*100 + 250*100*0.2 = 30,000 USDT
(Assumed 20% margin for perpetual trade)
After the fork:
BCH Spot = BCHN Spot (240 USDT) + BCHA Spot (25 USDT)
BCH perpetual price (240 USDT)
Close BCH spot long at 240 and BCHA spot at 25 USDT.
Close BCH perpetual short at 240 USDT.
Spot PnL = 100*(240-250) + 100*25 = 1500 USDT
Perpetual PnL = -100*(240-250) = 1000 USDT
Total PnL = 2500 USDT
PnL % = 2500/30000 = 8.33%
As calculated, there was a 8% potential return in the recent BCH hard fork. If we take account of transaction and funding costs, the resulting PnL will be around 7%. But this PnL can be realized within a week. A quasi risk free return of 7% for a week is very attractive even for an aggressive investor.
XRP and Spark Token Airdrop
Such forking opportunities in cryptos are not very uncommon and as we progress deeper into a bull market we will see more such trades come through. There is an upcoming airdrop of Spark token on ripple blockchain. XRP investors will receive Spark tokens in 1:1 ratio in their eligible accounts on the snapshot time at 12 Dec, UTC midnight. One can play this opportunity by taking a long position in the XRP spot while shorting XRP Perpetual Swap contract on Delta exchange. Spark tokens will be like a dividend reward to the token holders. Further, a similar airdrop is expected in XEM blockchain in Jan next year. Traders should keep an eye for such opportunities and expect to get rewarded handsomely.