Has the Cryptocurrency Dream Island with Asymmetric Risk Gone Wrong? – Mega Star KOL Strategy Signal Annualized at -95%
OKX Trading Signal Platform
A superstar Key Opinion Leader (KOL) has caused a community discussion and debate due to their strategy showing a -95% annualized return in a 30-day backtest. What should investors pay attention to when using strategy services that claim to help them trade easily?
Contents:
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Superstar KOL’s Strategy Hits a Roadblock! -95% Annualized Return in a 30-day Backtest
What is a Signal Strategy?
Profit Model of Signal Strategies
Analyst: Risk Asymmetry in Strategy Copying
How to Solve the Risk Asymmetry?
Entrepreneur: Rule Design Needs Improvement
“Half-life Sharing” Mechanism
Discussion: Will Anyone Take Responsibility When KOL Has to Pay More?
The aforementioned superstar KOL’s signal on OKX resulted in a total loss of $930,000 (in USDT) for their subscribers, with a -95.86% annualized return in a 30-day backtest. The signal only focused on two trading pairs: BTCUSDT perpetual and ETHUSDT perpetual.
Due to the poor performance of following specific signals, many people have begun to discuss whether people understand the risks of such products and the transparency and responsibility of signal creators.
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Signal strategies allow traders to showcase their customized digital currency trading strategies on the platform. Traders can have full control over their designed algorithms, and the strategies will be executed in real-time with high performance and reliability.
OKX’s signal strategy platform is divided into free, monthly subscription, and profit-sharing models, allowing traders to share their strategies while having the opportunity to earn profits. Taking the aforementioned superstar KOL as an example, they adopt the profit-sharing model for subscriptions. If their signal creation strategy is profitable, they will receive a 20% profit-sharing.
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Analyst Yu Zhe’an expresses a more cautious view on trading features such as strategy copying.
He believes that if the strategy provider is not financially interested nor assumes the risk of your losses as a subscriber, they should not make decisions for you.
He uses the example of “Skin in the Game: Hidden Asymmetries in Daily Life” to illustrate situations of risk symmetry and asymmetry.
Example of risk symmetry: “In most cases, the final payment is usually tied to acceptance, and various products usually have so-called warranties or liability insurance, which is a rule design that makes risks tend to be symmetrical.”
Example of risk asymmetry: “Celebrities who have children and assets overseas and can escape at any time advocating and supporting wars.”
In his view, “strategy copying” is a design with risk asymmetry. It is understood that because people do not know how much of their own position the strategy signal creator is trading with, there may be a situation of risk asymmetry when the subscriber’s own investment exceeds that of the strategy signal creator, as the subscriber bears a greater financial risk.
Analyst Yu Zhe’an believes that making the interests of strategy providers and subscribers aligned may be a solution.
“In principle, if the strategy provider makes money, they should make money together, and if they lose money, they should naturally bear the losses, or even more.”
He gives an example: If the total amount of the subscribed strategy is $1 million, the strategy provider must invest 10% of the total amount in order to qualify for a 20% profit-sharing with the users, and it can be increased proportionally.
In addition, profit withdrawals by strategy creators should also be subject to time restrictions. Subscribed profits should be executed within the strategy for at least six months before being gradually withdrawn. He even believes that even if there is no risk asymmetry, users will still buy, so improving user quality should drive the trading platform to make improvements.
Entrepreneur Fenix Hsu also agrees with the issue of misalignment between strategy providers and users and extends it to the APR distortion issue in the DeFi world.
For example, in UniSwap v3’s AMM strategy, because the strategy provider does not specify whether their APR is the actual APR or FeeAPR. Therefore, it is common to see users putting funds in based on high displayed APR, which eventually leads to the loss of principal. On the other hand, the strategy provider only focuses on high transaction fee annualized returns, leading to misalignment of interests.
Fenix Hsu proposes two suggestions for improvement: one is the calculation method for the actual APR mentioned above, and the other is to establish a reasonable profit-sharing mechanism for strategy providers.
Fenix Hsu states that the profit-sharing mechanism commonly used in hedge funds, known as “High Water Mark,” can only distribute profits when the fund’s net asset value exceeds its historical high. However, the premise is that users must enter and exit at the same time and have consistent calculations, which may be difficult to implement due to the nature of Web3, where users can enter and exit at any time and there may be various equity tokens.
Using their own startup project, Teahouse Finance, as an example, Fenix Hsu proposes the “half-life sharing” mechanism, which extends the time for strategy providers to take their profit-sharing. When the strategy performs poorly, the previous profit-sharing will be used to cover the losses, holding the strategy provider accountable for the long term, effectively aligning the interests of both parties.
Although blockchain financial services bring many innovative ways to play due to their freedom, they are still fundamentally rooted in their essence. However, in traditional finance, mature financial regulations restrict many things.
The field of cryptocurrency investment is still in the dividend period of regulatory arbitrage, where many things are undefined and difficult to govern. Therefore, investment funds and investment advisors, similar in nature, have not been regulated by current laws.
As a result, trading products and services for virtual assets have flourished, and exchanges and KOLs with followers have become mutually beneficial. Exchanges can earn transaction fees from users’ high-frequency trading, while KOLs essentially act as investment advisors or even fund managers, sharing profits from user trades and earning commission fees.
When performance is excellent, the community regards KOLs as superstars. When performance is poor, they criticize them and demand stricter systems to protect investors. However, if KOLs understand that they are accountable for their performance and their profits are restricted, will they still be interested in participating? As rule makers, will exchanges actively discourage KOLs?
“Do we want the cryptocurrency community to grow up? Or do we want everyone to continue to stay in Neverland as children?”
Fenix Hsu
OKX
Yu Zhe’an
Signal Strategy
Risk Asymmetry
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Further Reading
Grayscale Sends 588 Million MBTC to Coinbase, BTC Falls to 38K, ETH Breaks 2.2K
Yu Zhe’an’s Perspective: Bitcoin Spot ETF = Bull Market? Understanding the Blind Spots and Actual Impact of Bitcoin ETF in One Article
