DeFi

DeFi startup offers ETF analog allowing investors to trade on trends

Quick Take

  • Set Protocol, a startup that allows users to tokenize baskets of cryptocurrencies, now offers tokenization of trend trading strategies
  • Users can mint and hold Set Protocol’s tokens while their chosen baskets are automatically rebalanced based on their trading strategies
  • This new feature is targeting amateur investors who are interested in trend trading but do not usually have the market expertise like professional traders

The highly volatile cryptocurrency market is fertile ground for speculative trading, and a company that tokenizes investment strategies wants to help retail investors capture the upside and minimize the downside via a new token. 

Set Protocol, a San Francisco-based DeFi startup, announced today that it has launched tokens, or “Sets,” to represent a basket of cryptocurrencies that can automatically rebalance based on different technical indicators. This means investors without any sophisticated knowledge of various trading techniques can also trade based on market trends.   

How it works

The first trend trading “Set” that the company has made available is a basket consisting of 100% ETH or USDC. The Set follows the ETH 20-Day Simple Moving Average index and will automatically convert all ETH to USDC when the current ETH price stays below the index price for six hours and vice versa.

The company is betting that this new offering will appeal to amateur investors, who are usually deterred from trend trading due to the market expertise required to understand various technical indicators and trade accordingly. With Set Protocol’s offering, however, these investors are able to choose the “Set” they want and let the system buy and sells digital assets for them automatically. 

“There’s a number of people who actually pay attention to technical analysis, but they don’t have the time, effort, knowledge, or discipline to actually implement these strategies well,” Set Protocol CEO Felix Feng told The Block. “So this is the first time we think that the amateur traders will actually be able to get exposure simply by getting a token.” 

Better performance

According to Feng, trend trading is also a particularly effective strategy in the Wild West of the cryptocurrency market, which is riddled with speculative trading. Feng pointed out that compared to traditional assets like stocks and bonds, digital assets lack a clear valuation model and therefore leaves space for eye-catching price swings that in turn generate momentum for trend trading to profit. 

“You don’t have a valuation model for crypto yet, and that’s why you have frequent mispricing and lots of volatility,” said Feng. “That’s why, to an extent, momentum trading works.” 

In a test the company ran based on historical ETH price data, the 20-Day SMA tracking Set has consistently outperformed a 100% hold ETH strategy in the bear market of 2018. 

More Sets

Prior to the trend trading strategies, Set Protocol launched the tokenization of two other categories of investment strategies in April. Since then, the company has grown from $70,000 in assets under management to around $450,000.

Looking ahead, the company plans to roll out more trading strategies and Sets that consist of different tokens. For one, it is looking to include ETH lending platform Compound’s tokens to give some Sets interest-yielding capacity. 

I think the moving average strategy (based on technical indicators), if you can add interest tokens such as Compound’s cTokens or [Fulcrum’s] iTokens into it, I think it will become extremely compelling,” said Feng.