Who doesn’t love 30X’ing their money?
If you’ve read our derivatives report series, you’ll know that we’ve been exploring the DeFi derivatives sector in depth for around 6 months, getting down and dirty with the most innovative protocols in the space, speaking to founders and teams, and weighing up who will take the crown.
I’m no sorcerer, but after months of deep research, I’m confident I can leave the crystal ball at home, and still give you some grade-A alpha.
So, without further ado, let’s discuss our 30x derivatives protocol!
Disclaimer: Not financial nor investment advice. Any capital-related decisions you make are your full responsibility and only you are accountable for the results.
Options are a vital part of any financial market.
In the TradFi ecosystem, they have more volume traded than the equities (stocks) themselves.
If crypto reaches the same levels as our equity markets, that is nearly $1b per day in crypto options volume. This would mean a potential 500-1000x growth multiple for the market from here!
DeFi options are growing at a rapid pace, both in use and protocol development.
We are early, and we know our winner – read on to find out who it is…
Before we get into it, be sure to read the market conditions section towards the end before considering whether you are interested in the protocol or not.
What makes it a 30x?
The options market is tiny at the moment, with a mere £35b in BTC & ETH monthly volume (I know, it sounds big, but trust me, it isn’t). It’s dominated by Deribit, a centralised exchange.
The reason the options market is so small is a simple one; we are early. Options are incredibly versatile instruments, and sophisticated traders can use the wide range of choices to create derivatives that suit a specific purpose.
For example, if they hold a range of alt-coins and want to protect against 75% of the potential downside, a basket of options can achieve this. The underlying asset, and goal of the basket, can be changed to suit any need!
CeFi vs DeFi
Currently, Deribit accounts for around 88% of BTC options volume, and 96% of ETH (see below, dark blue = Deribit).
Honestly, the user experience on Deribit is terrible. The reason it captures such a massive portion of the market is its first mover advantage.
We are seeing a shift from CeFi to DeFi as more users onboard, and trust in DeFi increases. This leaves a gigantic opening for the right DeFi protocol. But who will that be? For more information on the battle between DeFi and CeFi, and why we’re so bullish on DeFi options, check out our Don’t Lose the Option report.
If you don’t know what this is such a massive deal, read our Why Is DeFi So Damn Impressive? crypto school article.
Who Takes the Crown?
After 6 months of in-depth research, we are confident in our options top-pick. Now, the moment you’ve all been waiting for…
Premia is a DeFi option protocol. It allows users to provide liquidity to, or buy options from, a liquidity pool. Essentially, the platform performs as a mix between Deribit and Ribbon, except better!
Let’s run through some of the reasons we’re bullish on Premia:
Protocol built from the ground up to support upgradability and flexibility, DeFi’s ‘money-lego’ ethos, and fully decentralised and automated functioning.
All of this means Premia can slot perfectly into the future of structured products, and much more, coming in DeFi.
Funding has been granted for 2 DOV protocols to build on top of Premia.
They are going to open-source all code needed for others to build on Premia, opening the door for many more to use Premia as their base layer.
Unrivalled user experience.
Premia offers a range of strike prices and expiry dates in an impressive and simple dApp, with much more coming in V3.
V3 soon – full details expected early October.
It will include huge upgrades, Premia team state that it will ‘bring Premia in line with centralised exchanges’ – I would argue it could make Premia better.
Premia has released initial details of their V3, check it out here.
This, alongside their recent launch on Optimism, growing team and impressively low market cap all things considered makes them an amazing opportunity.
So, as you can see, there is a lot to be bullish about when it comes to Premia!
Before making any decisions on this report I would highly recommend checking out our Premia Deep Dive report, which goes into depth on the protocol, and considers the pro’s and con’s – of course, it’s vital that we look at any potential issues that could arise, which is done in the deep dive!
For our price target to be hit a few things will need to happen:
V3 successful released, with a positive impact on protocol use and liquidity.
Pro and Knox Finance launch their DOVs, and open-source their code-base (as agreed during grant process).
Other DOVs use the code-base open-sourced by Vaults.Pro and Knox Finance to build on Premia’s base layer.
Premia achieves accessible liquidity of $1bn and daily trading volume of $250m (including through other protocols built on top of Premia).
The macro environment is currently the worst in 4 decades, with inflation rampant, energy concerns, quantative tightening, and conflicts affecting food and other commodities. Financial markets across the globe are suffering, especially risk on one such as crypto.
Where the market goes next is unclear, with clashing narratives, we shouldn’t fight market structure. The bear market may see more downside, and that poses a risk for small-cap, high risk assets like Premia. Our researchers personally hold PREMIA positions which we’re bought prior to the market taking a dive. However, we aren’t looking to purchase any more at this current moment.
When we see a change in the Fed’s stance, this will signpost the start of a new bull market, and the bottom. At that time, we will personally be pulling the trigging and going in all in crypto, including on Premia.
Until that time, any small-cap crypto could suffer more drawdown. We hold Premia and personally as we can wait it out, and at the current valuation, we don’t care about missing a slightly better opportunity because the coin draws down further.
With that all in mind, let’s get to our targets!
Price target = Fully diluted value of $2.19bn (see the end of this report for calculations). The time frame fully depends on macro and the Fed (sigh), but we expect this to be reached within 18-24 months of the next bull market starting.
The ideal entry zone is more of a macro question than price analysis. The ideal entry zone is when macro and the Fed start to change position.
After loading up when the time is right, I personally will be taking profit on the way up, selling:
25% of my position at 2x,
25% of the remaining at 4x,
50% at 12x,
The rest once our 30x target has been reached.
Target Valuation Calculation
Before we get into the calculations, the data below was made at the time of writing. In the last week, we have seen PREMIA double it’s market cap. The reason, 2 fold. 1, fundamentals. The project is one we have had a close eye on for many months, as you can see from Premia Deep Dive, 2. Hype. Premia marketing, as mentioned in the deep dive, hasn’t been as focused on marketing. In our eyes, tech rules. Especially when it comes to something as vital as DeFi derivatives. This is clear now, with Premia gaining interest without a big marketing push.
Our growth target was for the winning protocol to reach the same options volume as Deribit in the next 3-5 years.
We calculated the price-to-earnings multiplier for both FTX and Coinbase:
Average volume multiplied by fees charged (as they charge 0.03%, we multiplied by 0.0003) = Revenue
Divided by current valuation (from most recent raise) = our price to earnings ratio.
This was 15x and 25x respectively.
We then added up Deribit’s Options volume for the last 12 months, multiplied that by the fees charged (same as above), giving us their revenue.
Deribit’s options revenue, multiplied by our median price to earnings figure (20x), gave us our target valuation – the current value of Deribit’s options trading activities.
Deribit options volume sit at around $1bn per day.
$1bn x 365 = yearly volume.
$365bn (yearly volume) x 0.0003 (0.03% fee charged) = yearly revenue ($109.5m)
Assuming a 20x price to earnings ratio, this puts Deribit at a valuation of $2.19bn.
Target MCap: $2.19bn
Current Premia fully diluted value (at the time of writing) = $76.6m
28.59X growth to our target fully diluted value of $2.19bn
Rounded up to 30x, as our targets our very conservative in our opinion.