Short Convexity | Jill Carlson

By in Expert on March 25, 2018
  • As adoption occurs, the token price will go up and the project will have more capital to fund development.
  • Prices reflect whether the market thinks the bond has become more or less risky since it was issued.
  • If a bond has positive convexity, the bond will experience larger and larger price increases as the yield falls.
  • Put simply, if you are long convexity, your risky exposure increases as the market moves in your direction and decreases as it move against you (yay!)
  • Here’s the problem: right now, token projects — despite their talk of antifragility (another word for convexity) — are all short convexity in their overall business models.

jillcarlson writes (key points selected):

As adoption occurs, the token price will go up and the project will have more capital to fund development.

There’s this concept in bond markets called convexity.

Those prices reflect whether the market thinks the bond has become more or less risky since it was issued.

The relationship between the price and the yield largely gets captured by the something called the duration of the bond, or the change in dollar value per unit move in the yield.

If a bond has positive convexity, the bond will experience larger and larger price increases as the yield falls.

Put simply, if you are long convexity, your risky exposure increases as the market moves in your direction and decreases as it move against you (yay!)

One of the number one rules of the bond trading desk is to, all things being equal, always be long convexity.

Here’s the problem: right now, token projects — despite their talk of antifragility (another word for convexity) — are all short convexity in their overall business models.

Remember: the whole idea is that they will use the vast sums of their own token to fund the project over the long term.

Projects may find that the most prudent thing to do in a downturn is to sit on their tokens rather than try to sell them into an illiquid and unfavorable market.

Read the full article: http://jill-carlson.com/short-convexity/

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