Putting the Super in HODL, with Zero: #SuperHodl

If you are active on Twitter, you may have seen some of the early tweets on #SuperHodl. And to start with a shameless plug: follow me on @SovereignOrigin if you want to get daily updates on the following and other Bitcoin-related topics.

Hi! I’m Sovereign Origin, or SovOri for short. I prefer to remain pseudonymous, which means I will only share a little about myself. My background is in engineering, and I’m based in the EU. I am a bitcoin maxi, but I don’t think I’m necessarily toxic—I need to work on that. 

I got involved in Bitcoin in 2017 and have been HODLing quite passively since. I found my way to RSK and Sovryn at the end of 2021 and got excited about the then-musings of the Zero protocol. Borrowing against your bitcoin in a decentralized manner, 0% interest and no payback term? Yes, please! This is peak financial freedom. 

After many sleepless nights (yes, I also have a day job), it dawned on me (ha, that’s a pun) that there may be a way to use Zero for leverage in a responsible way. Yes, you can go 11X (theoretically) at a 110% collateral ratio and re-re-re-hypothecate your bitcoin to further draw dollars from the Zero line of credit. But this seemed to me like a casino play. 

Instead, what became SuperHodl is a safer strategy of pushing some dollars from the loan to buy more bitcoin in a recurring fashion. Many questions pop up. Can we do this while “guaranteeing” that we do not default on our loan? Can we make these returns and guarantees “automated” so we don’t need to babysit our loan on a day-to-day basis? After all, I’m lazy, as all good engineers are, and I want to manage my risk. But I still like yield. And I don’t want to deposit my coins with Celsius. This Zero business could be amazing! How do you guarantee and optimize such a strategy?

In simple terms, SuperHodl leverages $ from Zero in upswings to buy more bitcoin and stack a $ reserve simultaneously. Both borrowed $ and bitcoin collateral are potential sources to draw from when the price goes down to protect the Zero credit line from liquidation. When more bitcoin is bought, we also put some of it back into the loan to compound the strategy: more $ can be taken out next time the price rises! This latter idea was borrowed from fellow Sovryns @NorthbridgeMatt and @EdanYago.

While, as a bitcoiner, I do not care for dollarized yield, it is a fact of life that yields on bitcoin have been traditionally low or risky (SuperHodl fixes this!), whereas in dollars it is easier to find reasonable rates. What if the reserves kept in dollars can generate some form of yield to create a healthy cushion on the reserve over time? Enter Sovryn once again; several dollar-denominated yield products exist. The simplest one—and the one that I’ve been using so far—is a simple dollar lending pool, historically returning 4-5% APY. However, there is a catch: what happens if many bitcoiners use this product? The automated return curves dictate reduced returns when an overflow of minted dollars fills the lending pool. Luckily, it is easy to show that this does not matter for SuperHodl: when fixing reserve yields of 0%, the algorithm can still be tuned not to liquidate, at least across bitcoin’s price history. Algorithm returns are somewhat affected, so there may still be room for optimization in this area. Kudos go to @AlexanderKalian and @Suf_Ali10 for their help in backtesting and forecasting, which really helped to squeeze out some bugs and get to grips with the impact of volatility on the algorithm. We may publish parts of the study results at a later date.

The algorithm thus executes trades to stack sats and maintain Zero in a healthy place. While I have been brainstorming with several Sovryns about what SuperHodl could look like as a Sovryn product, there is no conclusion or promise to be made. Can this in fact be automated? Can we make a simple one-click GUI? Does the user need to know there’s a Zero loan behind it? What about locked funds while your bitcoin wallet is too low on funds to pay back the loan at a given point in price history?

At present, my plan is to publish signals on my Twitter account, so follow me on Twitter if you’d like to receive these signals.

A very critical element—crucially important to me as a bitcoiner—is that I do not intend SuperHodl to be a trading engine, i.e. sell high and buy low (or was it the other way around?). In fact, I do not want to sell bitcoin at all. If bitcoin trades down, selling off bitcoin to maintain your loan would only make the drop steeper as the algorithm would follow the bearish hive mind. That problem is exacerbated if many people are SuperHodling. The point of Zero is that we won’t have to sell: if you need moar $, just extend your loan. Note that the algorithm never sells: in downtrends it puts reserve dollars back into the Zero loan, and in uptrends it accumulates bitcoin and dollars in a healthy way. A second reason to avoid selling bitcoin is that it could be a taxable event depending on where you live—we are of course all law-abiding citizens and report any and all trades we make. 

When price goes up and the collateral ratio is pushed above a certain target (250% in the current version), $ can be borrowed from Zero. Part of the borrowed $ are used to buy RBTC, and part are deposited in a $-yielding reserve (right now a lending pool). Some of the newly purchased RBTC will be injected back into Zero as extra collateral. On the next upswing we’ll see the benefit of this, as more $ can be taken out.

When price goes down, specifically below a certain safety margin on liquidation, typically triggered at 150%, a payback flow occurs from the $ reserve to Zero in order to bring the collateral ratio back to 250%. If this would use up the full reserve (possible in severe downswings), the algorithm may also use RBTC from the wallet to directly increase the collateral and bring the collateral ratio back into the safe zone again.

So, you never need to sell any bitcoin unless you exit the algorithm. In that case, you probably need a one-time sale of bitcoin to have the dollars to pay back the loan. However, you may just bring in the dollars externally and pay the loan back that way. Remember, Zero by itself doesn’t care. SuperHodl is a really, really clean concept: it puts no sell pressure on bitcoin ever. Instead, it fires up that sweet Zero money printer based on bitcoin as a pristine asset to further push bitcoin’s price up. If you #SuperHodl, you help bitcoin win!

Now, what is all this good for? See the diagram below for the backtesting results across bitcoin price history going back about 12 years. Backtesting shows #SuperHodl gives us a return of more than 40% on your bitcoin after about 10 years of running the algorithm (historically). The graph shows returns expressed in “linear gain”, i.e. the factor between bitcoin deposit at the start and the bitcoin after closing the loan.. 

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I wish I could have started 12 years ago! Backtesting on bitcoin price: running SuperHodl for various starting points throughout 12 years of price history (X-axis increases the duration by starting further back in price history) and assuming 5% constant return on the dollar reserves and constant 0.5% origination fee. 

At the start, (given the recent bear trend) the algorithm is down in absolute terms; i.e. if you’d have started at the recent peaks you’d need more bitcoin to pay off your loan (and may even need to add dollars from out of pocket to close). After about 21 months the algorithm reaches parity (i.e. SuperHodling through the rise of 2020-2021, accumulating there, and then have those accumulated bitcoins pay back for your loan even at current, lower prices). Of course, it’s not very interesting to exit at 0% returns. The goal is to stack for the long term, and leverage a little bit, while having safety precautions so you can sleep at night.

No get-rich-quick schemes here. No scams. Put in money that you can lose and that you don’t need for the short term. Expand your time horizon. You need to withstand the test of bitcoin’s price volatility. The Zero loan will have moments at which it is in really bad shape, and your funds may not allow you to exit. Will our backtesting and forecasting have been enough? Time will tell. I’m surely going to try.

In the current algorithm experiment, we have a liquidation price (including the reserve) of 96% below current price levels. While that seems a bit much (it translates to a $936 RBTC price - are you bullish enough?), recall that the algorithm must work both at blow-off top peak prices as well as deep bear market lows. This current value does say something about the buying opportunity today, however.

Beyond SuperHodl, I see another major use case for Zero, and that is a much simpler one: giving bitcoiners access to fiat while the world has not yet shifted to a bitcoin standard. You can now receive a salary in bitcoin, mine bitcoin, sell things for bitcoin, and extract just the fiat you need to live off. I’d love to see a quick-and-easy banking off-ramp for this.

Sign up for the Zero early access waitlist.

Stay Sovryn

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