At Belobaba it is clear to us that POLKADOT will be a dominant infrastructure in the field of decentralized financial applications, proof of which is the great reception that the parachains have had in a rather convulsive market moment.
Our main differentiation from other funds is that our returns are directly proportional to the level of human capital that makes up each section of Belobaba. This clarity moves us away from “buying low and selling high” or “looking for shortcuts to achieve returns”, to get closer to our reality and objective, “to be able to maximize all the returns we seek and achieve when investing”.
In order for me to explain my investment strategies when selecting an asset, it is necessary to put in context the protagonist of the article and my thesis, cDOT.
The thesis is born out of the room for maneuver already offered by DOT and one of its first parallel.fi AMMs which allows us to leverage the cDOT token, a DOT-derived token obtained by contributing collective loans on parachains. There are several of these derivative tokens, bDOT if you contributed through Binance, lcDOT if you contributed through Acala Network or cDOT if you contributed through Parallel.
Well, the thesis was born when I understood (during the various meetings held with my team) the similarity that this funding model had with the one that banks have historically offered us through the custodian. On this occasion Polkadot acts as a bank and offers us a custodian for 2 years of our DOTs, in exchange we will receive gems that will come out under its ecosystem to use as we want and a certificate that endorses us as holders of those DOTs (the famous cDOT). Once the 2 years have passed, we can go back to Polkadot and claim our DOTs with that ticket.
In the course of those 2 years we can (if we need it) sell the certificate (cDOT) to obtain immediate liquidity (yes, with a discount, since it is a DOT certificate, not the original DOT), or buy more if we are clear about the potential of this certificate, which is based on DOT token and not on the DOT dollar price.
Risk always exists, but we have to live with it, so I understand that you may wonder where is the compensation or neutralization of that risk? The answer lies in the advantage that we are given by being able to convert 1 cDOT for 1 DOT in 2 years, to understand it better I invite you to look at POLKADOT in this way. Let’s say that for me accumulating cDOT is equal to accumulating square meters of a highly valuable land in a very early phase, an ideal land to urbanize, being able to build on it good infrastructures that will attract businesses and people generating development opportunities. Right now, with a bear market, bad news and a generalized discouragement, nobody sees this orchard and the bargain price that each square meter has, but we do see it and that is why we believe it is an extraordinary opportunity that we cannot let pass.
“Sentiment does not create our thesis, our thesis is based on data, studies and medium/long term valuations of what we objectively see”
The other risk compensation is that Parallel has been applying for several months an excellent discount on the purchase of the cDOT ticket, since it offers us with 1 DOT = 1.46 cDOT, unbeatable negotiation at the exchange rate in 2 years, where with 1.46 cDOT we will receive 1.46 DOT, generating already a 34% APY in DOT. This is without going into speculation about the increase in the price of each DOT token by the end of 2023, the date on which this exchange can become effective.
But the magic of DOT lego money does not stop here (it would be very easy to develop this strategy), with the landing of the parachains we begin to glimpse much more potential due in large part to the fact that a new capital market is being created, and this always brings with it risks and incentives, so once everything is assessed, we have begun to combine a passive strategy with the simple exchange of DOT for cDOT, to a more active one using the AMM Parallel.
The thesis is to lend the cDOT that we are generating by performance in a leveraged loop under a very controlled risk against a possible liquidation, since we lend and borrow the same asset, therefore, price volatility does not affect the health of the loan, but even so we will only do it at 50% of the total value that we can ask, ensuring a good health of the loan and continuously monitoring the PEG of price 1 cDOT:1 DOT (we already have precedents of detachment with stETH / ETH).
When lending we are incentivized with a current APR of 14%, therefore, as we have chosen to ask for 50% of the value we have in cDOT for DOT and these DOT will be exchanged again for cDOT at 50%, we will work a leveraged loop system until we do not get more loan limit.
VERY IMPORTANT: “My recommendation here is that you do not do this strategy on your own, never overleverage yourself thinking that nothing can go wrong and much less without measuring well all the risks to which you expose yourself. Do not do it thinking that you will win more than anyone and that you are the smartest of the class, if you still have it clear and you go for everything, I wish you luck“.
To help you in the comprehension of this panicked strategy, visualize the steps and understand the following numbers:
With 100 DOT Parallel gives us 146 cDOT.
Parallel allows us to deposit and borrow, therefore.
I deposit 146 cDOT which is 100 DOT to borrow 50%.
I receive 50 DOT of that loan, which I exchange at Parallel for 73 cDOT.
I deposit 73 cDOT which is 50 DOT to borrow 50%.
I receive 25 DOT of this loan, which I exchange at Parallel for 36.5 cDOT.
I deposit 36.5 cDOT which is 25 DOT to borrow 50%.
I receive 12.5 DOT of this loan, which I exchange at Parallel for 18.25 cDOT.
I deposit 18.25 cDOT which is 12.5 DOT to borrow 50%.
I receive 6.25 DOT from this loan, which I exchange at Parallel………
And so on until I have no loan limit.
To summarize numbers and profitability, we have managed to go from an initial 14% APY to be able to get 54% APY at the end of 2023 with this strategy (16 months), therefore, you will convert an initial investment of 100 DOT into 172 DOT approx. (discounting the interest payment to return the borrowed DOT)
What will be the trading price of 1 DOT by November 2023?
To this good question I can only answer with a good answer, today it trades at $6.87 in the future no idea, but as soon as we have data on the cash flows that Polkadot can generate thanks to all the transactions generated by the applications running on its network, we will be able to estimate more accurately its price almost 2 years in the future.
It is true that Polkadot in recent weeks has been experiencing significant sales pressure due to an increase in circulating funds, in addition to a reduction in demand for the DOT used in PLO. This is certainly one of the reasons why it is not able to increase prices in the short term. However, activity in the ecosystem continues to be remarkably outstanding, as DOT after BTC and ETH is the project with the largest inflow of investment from private funds.
In the absence of more use cases for DOT and more penetration of stable coins such as aUSD, USDT or USDC, its ecosystem continues to grow at a good pace. In short, yes there are reasons why the price of DOT does not increase just in these last weeks, but in the long term I see it as an opportunity to position itself as the most solid project for me after BTC.
My personal oracle, based on various financial and tokenomic metrics on DOT tells me that it should be around $16 each DOT by those dates, therefore, in the long term I see very reasonable our position to stay in DOT, a very solid project, but as always DYOR.