Bumper Shines in Bitcoin ETF Fallout - Bumper’s Hedging Premia compared to Options

With Bumper now operational on Arbitrum, we can access real data, allowing us to aggregate and interpret position information and protocol performance. This shift from simulated to real data provides tangible validation of Bumper’s performance, especially in light of recent market fluctuations caused by the Bitcoin ETF announcement.

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TLDR; 

• Bitcoin saw a 17% drop during the ETF announcement period
• Bumper-hedged position premiums cost an average of 0.1% of position size (5% annualised)
• This cost was 96% cheaper than observed put options premiums (via Deribit) for equivalent positions
• Bumper users saw, on average, a 9% price drop over the period of their hedge position. But the value of their position only dropped 1% as they were protected at a 99% floor.

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BTC ETF Announcement Impact

The long-anticipated approval of a Bitcoin ETF by the SEC created significant speculation and volatility in the crypto market.

On 11 January 2024, the SEC finally approved multiple spot Bitcoin ETF filings, after a little commotion caused by a ‘hacked’ X account announcement.

In our pre-announcement Trading Chat Livestream we discussed two strategies for hedging wBTC with Bumper, recognising the uncertainty as an opportune moment for crypto holders to safeguard their assets against potential losses.

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Bumpering your assets

As it turned out, opening a hedging position with Bumper proved a very wise trading decision, as the subsequent drop in Bitcoin's value justified the need for such risk management tools. 

Before the official announcement Bitcoin surged to near $48,000, settling to just above $46,000 post-ETF approval. Despite expectations of increased mainstream capital, Bitcoin hovered around $43,000 before falling closer to $41,000. The market volatility triggered nearly $20 million in liquidations, with the majority stemming from long positions. 

Over the 7 days following the high, Bitcoin’s price fell 17% placing Bumper Taker positions opened at the high and with a price floor above 85% in a position to claim USDT. Thereby outperforming the market and either rebuying at the lower price or strategising their next move. 

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Protocol Performance

Throughout this period the protocol remained solvent with a stable TVL, excluding any deposits and closures. This reaffirms the protocol’s ability to rebalance as expected.

Rebalancing of the protocol is a critical process that ensures the stability and efficiency of the system by dynamically adjusting the liquidity between the Taker and Maker pools. This process is designed to respond to market conditions and internal liquidity demands, maintaining a balance that minimises costs and maximises yields.

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Position Data

Evidence from the Bumper Community has shown that several users took advantage of the drop, including our Bumper Intern. Examining the protocol position data reveals several positions below which were opened close to the top of the market.

wBTC/USDT Market

See full position data

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The above data shows that users paid an average premium of 0.1% based on their position size (4.96% annualised). Across the period users saw an average of 9.12% drop in price. To have paid a 0.1% premium over this period makes Bumper an incredibly efficient method to protect from downside volatility. 

It’s worth noting that higher floors will see higher premiums, so given the nature of the drop these premiums could have been reduced even further.

The above data shows that users paid an average premium of 0.1% based on their position size (4.96% annualised). Across the period users saw an average of 9.12% drop in price. To have paid a 0.1% premium over this period makes Bumper an incredibly efficient method to protect from downside volatility. 

It’s worth noting that higher floors will see higher premiums, so given the nature of the drop these premiums could have been reduced even further.

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Comparison with Put Options

As a tool to manage volatility, Put Options stand out as the most comparable to Bumper. As the leading crypto options exchange, we used Deribit to compare premiums for equivalent positions.  

On 11 Jan, 2024 there were 23 Put Options sold at a 7-day term and 99% floor level. For these positions on Deribit the average annualised premia was 148%, with a minimum of 131% and a maximum of 160%. 

When comparing Deribit to Bumper, the premium for buying an equivalent Put Option would have been 2,883% (yes, nearly three thousand percent!) more expensive or better said as Bumper was 96% cheaper!

Deribit Put Option Data

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Position Cost Summary 

With solid indicative numbers flowing through, it’s important to acknowledge that the protocol is still in its early days on Arbitrum mainnet and will continue to receive technical refinement to ensure a balance between competitive premiums for Takers and attractive yields for Makers. 

However, the compelling numbers strongly suggest that Bumper not only offers a novel approach to trading downside volatility but also proves to be a cost-effective solution compared to the cheapest market competitor out there.

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Future Opportunities

Bumper's performance as a robust risk management tool positions it favourably for increased future use. Apart from incorporating Bumper into existing trading strategies, upcoming events like the Bitcoin halving and a potential Ethereum ETF announcement in May present clear prospects for safeguarding against downside volatility.

In conclusion, Bumper not only stands as an efficient tool for present risk management but also holds promise for future market scenarios. The ongoing refinement and optimisation efforts indicate a commitment to maintaining its effectiveness in the ever-evolving landscape of crypto trading.

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