The original Chinese version of this article was first published on July 1, 2024. It has been translated into English at the request of users.

Today is the first Wednesday of July, which means it's time for the Drift portfolio review. If you're seeing this for the first time, you might want to check out this article first: [How to Hold Bitcoin to Maximize DeFi Benefits].

TL;DR: In the first 30 days, this portfolio outperformed simply holding Bitcoin by 2.32%.

1. Data Comparison

Let's look at the data (you can see real-time changes in the portfolio through this Sonar link. ( It seems that there might be an issue with Sonar, as it sometimes doesn't work properly. Please use this Step Link. )

1.1 Account Balance

After one month, my portfolio balance dropped from $5,833 to $5,504, a decrease of $329 or 5.6%. You might notice that my BTC and ETH balances actually increased, which I'll explain later.

The drop in account balance is simple to explain: BTC and ETH prices fell sharply. BTC dropped from $68,424 to $63,391, a decline of 7.3%, and ETH from $3,783 to $3,469, a decline of 8.3%.

1.2 Risk Hedging

The decline wasn't as steep as BTC and ETH because of the hedging through short contracts and the income from funding fees.

The contracts shown in Sonar are in the red, but actually, each contract has been profitable up to now.

The losses shown in Sonar are just the unrealized (unsettled) red parts. The realized (settled) profits, minus the unrealized losses, are actually profitable. These profits are already included in the USDC balance.

Let's look at the funding fees.

The last accumulated balance was $63.97, and now it's $142.19. Over 30 days, it increased by $78.22. Using a principal of -$10,444, the APR is 9.1% (=78.22 / 30 / 10444 X 365). However, the current USDC borrowing rate is 17.44%, so the funding fee income can't fully offset the interest loss.

1.3 Summary

1.3.1 Profit Comparison

If 30 days ago, with a balance of $5,833, I simply held 50% BTC and 50% ETH, my current balance would be $5,378 (=5833 x (1-((7.3%+8.3%)/2))), $125 less than the current balance of $5,504.

From the numbers, this portfolio outperformed simply holding the coins by $125 (= 5504-5378), or 2.32% (= 125 / 5378).

1.3.2 Peace of Mind Comparison

Obviously, simply holding BTC and ETH is the most stress-free. However, this portfolio isn't far behind. Even without considering the contract hedges, the current leverage would only be liquidated if BTC prices drop to $32,191 or ETH to $1,753.

2. Actual Operations

After setting up the portfolio with the "leverage + hedge" strategy, I've been pondering:

1. How much leverage is optimal?

2. When to buy/sell BTC and ETH?

3. When to buy/sell contracts?

The first two questions have clear answers; the third is still under consideration.

2.1 Leverage Not Exceeding 2.5

The leverage metric can be seen on the left side of the trading page (see the boxed area in the image below). Currently, it's 2.77. When buying BTC or ETH, this value shouldn't exceed 2.5, and it shouldn't exceed 2.5 after the purchase either. Although it's 2.77 now, it didn't exceed 2.5 at the time of purchase.

Below is the record of buying BTC and ETH in installments. Since spot trading for BTC and ETH on Drift isn't active, swaps were used instead of the order book.

2.2 BTC/ETH = 1:1

Try to maintain a 1:1 ratio between BTC and ETH. When the difference exceeds $200, rebalance.

This was only done once when ETH exceeded BTC by about $200, converting $100 of it to BTC, also done through swaps.

2.3 Settle Unrealized Profits Promptly

When significant unrealized profits in contracts are observed, click the Settle button on the right side promptly.

In the image above, the settled profits came this way. The only benefit is reducing the USDC borrowing balance, thus lowering interest costs.

Currently, contracts only serve as hedges against price drops, with the total hedge amount not exceeding 50%. In the future, whether contracts should be treated like spot trades is still under consideration.

3. Operational Principles

As mentioned earlier, this portfolio is based on two key assumptions:

1. BTC and ETH are recognized as crypto assets by traditional finance, with long-term price growth.

2. Many cryptocurrencies without a capped supply or still inflating will see long-term price declines.

Today, we establish another principle: passivity.

1. Only buy BTC and ETH when the leverage ratio is below 2.5.

2. Rebalance if the difference between BTC and ETH exceeds $200.

Conclusion

While the portfolio has outperformed simple holding in the short term, we must acknowledge the market's significant uncertainty and volatility.

BTC and ETH both saw considerable drops over these 30 days. With such volatility, we can only hope to get the direction right. The upcoming interest rate cuts in the US and increased liquidity are the future drivers of the crypto market.

Investment is a marathon; mindset and strategy are equally important.

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