This video is going to be a fun one, but first you need to know it is for entertainment purposes only, and that we do not make any recommendations on this channel, instead we aim to inform. Moving forward, let’s talk about how I earned $600 from Ethereum crashing a couple weeks ago.
If you want the specific step-by-step tutorial to learn how to long and short Ethereum, or another crypto asset, you can skip the technical whiteboard part of this video that explains how it works.
What is Fulcrum?
Fulcrum is a protocol that allows you to essentially trade on margin. This means you can use your money to essentially have the power of 2,3,4, or even up to 5x your money. Let me explain with an example.
Case A: Ethereum is at $2000. You buy $1000 worth of a 5x long from Fulcrum, essentially investing $1000 hoping that it will go up. You are right! Ethereum moved from $2000 to $3000 overnight, meaning it went up 50%. Since you were 5x long on it, you earned 250%, meaning you made a profit of $2,500. This is when times are good, let’s go over when times are bad, though.
Case B: Ethereum is at $2000. You buy $1000 worth of a 5x long from Fulcrum again, however this time the market doesn’t move in your favor. The market crashes 24%. This means it went down -24%, and -24*5 is -120%. This means you lost your total investment of $1000, it was liquiditated sometime around when the price had dropped 20% and some other investor claimed your proceeds.
Essentially what you are doing is creating a leveraged position that has the ability to multiply your money depending on how you use it. Think of a really heavy object that you want to move. You can move it simply by using a lever with a pivot point close to the object and a really long arm. The longer the arm, the less force you need to apply, but it does stretch it out over a longer distance, but you can move the really heavy object with less total weight. This is basically what Fulcrum allows you to do.
What is a Long Position in Margin?
A long is a position where you believe the market is going to go up in the future. How is this created? Well, you borrow and lend two assets. Let’s think of an example. Let’s say Ethereum is $1000 and you buy $1000 of it, a whole token. You invest this Ethereum with Fulcrum and they say you can use it as collateral to borrow 80% of another asset. So with this collateral, you buy some USDC for 80% of the value. Now Fulcrum says they owe you 1 Ethereum and you owe them 800 USDC.
You again, buy Ethereum and deposit it into Fulcrum, and now Fulcrum says they owe you 1.8 Ethereum, and can borrow 80% of that $800 you just gave them. So now you borrow $640 USDC and repeat the process one more time.
In the end, Fulcrum owes you 2.44 Ethereum, but you owe Fulcrum $1952 to unlock it, you also have $512 USDC that you haven’t repeated the process with, but are just holding. Lucky for you, Ethereum doubled, so now on your balance sheet, you owe Fulcrum $1952, and they owe you 2.44 Ethereum, which is now worth $4900. So you come up with the money to pay them and you made a profit!
Instead of coming up with $1952 all at once, you can just reverse the process you did earlier and ‘unwrap’ your liquidity by putting in some USDC, unlocking some Ethereum that’s worth more, trading it for USDC again and then unlocking more Ethereum until you’ve cashed it all out.
I know this is kinda hard to understand, so we plan on explaining it separately with more examples and a bit slower in another video, which means you should hit that subscribe button and bell icon so you’ll know exactly when we post it. There’s also another idea you need to understand that deserves it’s own video and it’s if the price starts falling, you will get ‘liquidated’.
With few words, if Ethereum had gone the other way, if it started to crash, you would owe Fulcrum more money than they owed you, and they would start to ‘liquidate’ your position to make sure you aren’t running away with your money. Basically, you start losing money that you don’t get back if the price falls under a certain percentage.
Depending on how many times you borrow, exchange, then invest… you can control how risky your investment is. If you do it many times, it is very risky, but if you only do it once, it’s much safer if the price swings up and down. Also, if you do it many times, you get a much higher multiplier if it goes up, but you are more vulnerable because it doesn’t have to reach such a low price to be liquidated. You’ll see in my tutorial video what I am talking about in a few minutes.
What is a Short Position in Margin?
A short is an investment that gains value when the price of an asset decreases.
Without getting too technical, to create a short position you do the exact opposite of a long. Instead of depositing Ethereum and then borrowing USDC, you would deposit USDC and borrow Ethereum.
If Ethereum goes down, you make a profit, but if it goes up you start to get liquidated until you lose your initial investment. This is exactly how I earned that $600 by shorting Ethereum, however it was very risky and now that I am actually educated on the subject, I have to say I do not recommend shorting or even longing any crypto assets such as Ethereum because they are very volatile and you’re pretty much gambling. I just wanted to share my experience with Fulcrum as a way to get you interested into learning about the protocol, probably the best clickbait there is.
Where does Fulcrum get the money to borrow?
That is a great question! Fulcrum has an option to invest without borrowing, and they have paid decent interest for investors in the past. They loan this capital out to the margin traders.
This means you can simply use Fulcrum as an investment platform to earn an interest rate, but I’ll talk about this in the tutorial part and show the interest rates you can earn as well.
Also, any margin position has an interest rate associated with it. For example, if you wanted to buy a 4x long position on BTC, you’d have to pay 12% APY to the fulcrum protocol. I also don’t think I’ve mentioned you can make long and short positions on other assets as well, they have a few options.
Fulcrum is a tool built on the BzX protocol. They have a few other tools such as their own token and a lending platform called Torque. I would be interested to see any other tools they create, since Fulcrum and Torque both have around $20 million currently invested in their tools. Their governance token BZRX allows holders to vote on certain protocol updates and also stake their tokens for interest.
What are the benefits of using Fulcrum? There are 3 main things I see:
- They have crypto insurance. I’m not sure how much of an explanation I can give about this without getting technical, but you can buy crypto insurance and Fulcrum has it, so if there is ever a problem, the insurance protocol will pay out
- There is no KYC. Secondly, buying longs and shorts on the traditional market are crazy due to regulations and taxes. I’m not even sure if you can buy crypto margin calls in traditional finance, but being able to perform these trades without KYC is nice.
- They have been audited. Fulcrum and BZX have been audited by professional companies, so there are no obvious holes in the code or issues with mass-scale adoption, this is just a form of trust.