Invest in Polkadot auctions with a good strategy

In recent articles on cryptocurrency training we have delved into topics such as DeFi strategies to generate passive income with our cryptocurrencies. And with the bear market in which we are immersed, it seems that we have few opportunities to take advantage of in the cryptocurrency ecosystem. But this is not the case, since our veteran colleague from the Fi Academy Angel Prieto has told us a strategy to grow our DOT holdings. Let's start this cryptocurrency training on how to take advantage of Polkadot parachains and the investment opportunity of the Angel strategy...

How do Polkadot auctions work?

This cryptocurrency formation strategy will be based on the native token of the Polkadot blockchain (DOT). The strategy is based on the third step of cryptocurrency training that we wrote explaining if Polkadot could be the Ethereum killer. As we explained, parachain auctions require many DOT tokens. Projects that want to win the auctions make crowd loans to raise more DOT to win the auctions. In exchange, they offer us tokens from their projects as a reward for collaborating in the cause. If said project ends up winning the auction, our tokens will remain locked for 96 weeks. During these weeks we will continue to get reward tokens from the project that we have helped win the auction. 

And how can I know which parachains are the best?​

At first, we cannot determine which parachains will be successful. But if we delve into the fundamentals and data that the projects offer, we can do a screening to determine those that have the most potential. Let's continue the cryptocurrency training with some tips on how to choose a good parachain:

Team profile

One of the fundamental pillars to know if a project is trustworthy and if it may have potential is by analyzing the project profile. For example, if we are going to invest in a parachain, we must first find out who makes up the team that developed the project. It is vitally important to know the journey and experience that the team has to confirm that they are professionals and that we are going to invest in a project with a prepared team. It is also important to look at the interactions they make with users on social networks and the activity in the project's Github repositories. The why? 

Very simple; At the end of the day, it is the users themselves who are going to make the platform flow, which is why they deserve to be well informed about the progress and news of the project. Also looking at the activity of Github repositories also allows us to see the level of involvement of the developers in improving the project.

Utility and competition of the sector

The second piece of advice from this cryptocurrency training is to look at the usefulness of the project and the competition it presents with the sector to which it belongs. It is very important to identify the purpose for which the project was created to know if it is truly useful or simply a project with no future. At the same time, we must screen the different projects in the same sector. 

This will help us determine if the project we want to invest in has tough competition, or if it can perform well in that sector. For example, if the project we want to invest in is based on derivative products, we must look at the projects against which it intends to compete (DyDx, Perpetual Protocol, GMX...). 

Project investors

Let's look at the third tip of this cryptocurrency training. An important characteristic is also knowing which strong hands are supporting the project and who is collaborating with it. The support of institutional investors translates into a project that has potential and at the same time also complies with the first two pieces of advice that we have mentioned. We can consult this information on pages like Crunchbase. 

The presence of several institutional investors indicates that several large companies are interested in this project. The partners can also give us a sample of the expansion of the project along with collaborations in other protocols. For example, Binance offers the investment service in Polkadot parachains for projects that meet these guidelines, which are usually invested by the same exchange. 

Tokenomics

The fourth and penultimate tip of this cryptocurrency training is one of the most important. Basically because tokenomics is where we can fully visualize the economics of the project (if it has a token) and how it intends to incentivize users and the project itself. It also serves as great guidance for us to detect if the creators of the project themselves are committed to the project. 

For example, by observing the team's token allocation and how they are distributed, we can detect if the creators are truly committed to the project or if, on the other hand, they can leave without warning at an unexpected moment. It is also important to ensure that many tokens are not given to investors so as not to cause a supply shock that would alter the price of the asset if they sell their tokens. Finally, we must look closely at how the incentives are distributed to the community in the auction to determine whether or not we are really interested in investing in the project.  

Project roadmap

Last tip from this cryptocurrency training. Another point to observe is the project roadmap. This is because we must also know the plans for future developments that the creators have in mind to determine if the project has future potential or if it may fall into oblivion in a short time. This is quite important to also know how to balance our DOTs in the parachains, given that being blocked for 96 weeks we must carefully select where we block them. 

And what is Angel's strategy like?​

Don't worry, we have it ready, ready to come out of the oven. After having reviewed the advice from this cryptocurrency training to analyze a parachain, let's look at the strategy that the great Angel Prieto has taught us. First of all we are going to introduce him, he is one of our veteran colleagues from the Investment Training Academy, a great trader and investor who does not miss a single investment opportunity. It was precisely he who gave us the purchase recommendation for Polkadot, when it was in the range of $3,5 at the end of 2020, before marking its all-time high on November 4, 2021. 

So, let's explain the strategy: As we have explained in the first paragraph, when the Polkadot parachain auctions are held, many DOT tokens are required to be eligible to win the auction. This implies that, if we invest in a project in an auction and it ends up as a winner, we will have our DOT locked for 96 weeks. 

1. Analyze the platforms to invest in parachains

There are several platforms that offer access to parachain auctions, notably the Parallel Finance protocol (CDOT). Within Parallel we can observe both the tokens raised for the auction, the token with which liquidity is provided and the reward offered in the auction. Additionally, Parallel can also offer a bonus, which in the Ajuna Network example has not been the case. 

As we see, the liquidity we provide for parachains are not our DOTs. Instead, we add liquidity tokens, as would be the case with Parallel with its CDOT or the case with Acala with its LDOT. And what is important about these tokens? Basically its parity with the DOT itself. And this is where we find the great opportunity of this strategy. 

2. Check the parity of liquidity tokens with DOT​

Indeed, this strategy is based on the parity of the protocols' liquidity tokens against DOT. Binance entered the first Parachains, but has not participated in others since. When they offer a Parachains auction, we must look at the “Earn” section of Binance, although it is normally in Parallel where we can find the most auctions. To provide liquidity to these auctions, it exchanges the DOTs that users block for its liquidity token, the BDOT. These BDOT will be converted to DOT in a 1:1 ratio at the end of the token block after the 96 weeks that the Parachain lasts. 

The opportunity arises when we look at the BDOT/DOT parity chart. As we see in the chart below, BDOT is trading at a peg of 0.7372 (current writing time). This means that BDOT is currently trading at a 35% discount to DOT. 

As we see on the left side of the chart, BDOT climbed from 0.6018 to 0.7752 in mid-June. For example; If at the beginning of June we had converted 100 DOT to BDOT, we will receive the BDOT with a discount of almost 40%, that is, 140 BDOT. Subsequently, we have already seen how the parity rose by 26%. 

BDOT's peg to DOT rose 26% in 39 days. Source: Tradingview. That means that if we convert our BDOTs to DOTs, we will get a 26% return on our DOTs. We are not referring to it being revalued in dollars, but rather that we now have more DOT, which with a possible future revaluation of DOT will make us generate more profits. It should be noted that to get these liquidity tokens (BDOT, CDOT, etc...) it is NOT necessary to participate in the parachains, we can simply exchange our DOT for other liquidity tokens on the platforms. In turn, at Parallel we can find different types of CDOT on its platform. This is because each type of CDOT corresponds to different parachains of different celebration dates. This is because they give them different names to be able to differentiate the unlock dates of the parachains and, therefore, know when they will achieve 1:1 parity. 

What are the conclusions of this cryptocurrency training strategy?

After finishing this cryptocurrency training on Polkadot parachains, we see that this strategy is a great opportunity to get more DOT with a discount close to 50%. This allows us to obtain more BDOT now that the parity is not close to 1:1, and since the parachains at the time they end must return the tokens at parity, therefore our BDOT will be converted to DOT at 1:1 parity. We can also see that it is not necessary to participate in parachains to be able to obtain these liquidity tokens, so we can take advantage of this strategy without the need to have our tokens locked in a parachain.