Growing a cryptocurrency in which you have seen potential, but urgently need cash? Rest assured, this situation can happen to anyone. What’s more, we have a solution for you. After all, you can sell these cryptocurrencies but secure the right to buy them back at a certain price. All thanks to Kanga Sellback!
Let us imagine the following situation: Slawek would like to sell the cryptocurrency he owns to Luke. He believes that its value will increase, but for the moment he needs to monetise it. This is where Sellback, or more precisely the repurchase right mechanism used in this model, comes into play to ‘hedge against exchange rate fluctuations’. Without this, a person who now sells, for example, 1 BTC for 75,000 PLN, is not sure whether in 3 months time he will still be able to buy 1 BTC for 75,000 PLN, which is only, for example, 0.6 BTC.
The aforementioned persons therefore decide to complete the transaction. According to its assumptions, Slawek will receive payment from Lukasz for the virtual currency sold.
They therefore establish the following conditions:
– the currency of the transaction;
– the amount of cryptocurrency transferred as collateral;
– the amount for the cryptocurrency;
– the repurchase fee;
– the period during which the repurchase can be made;
– the resale price of the cryptocurrency at which Luke (the same one who will transfer the cash to Slawek) will be willing to cash it in the market.
Slawek hands Luke cryptocurrencies with a total value of PLN 100,000. In return, Łukasz hands Slawek PLN 50 000. At this point, the sale of the cryptocurrencies is just taking place. Slawek has six months to repurchase and pay a pre-determined fee, in case he would like his cryptocurrencies back.
When the agreement comes to an end and there has still been no repurchase, Lukasz has no choice but to sell the cryptocurrency received from Slawek based on current market prices. For himself, he retains the PLN 60,000 – i.e. the pre-agreed resale price of the cryptocurrencies on the market (this is the price the parties agreed upon, and the increased value of the cryptocurrencies transferred is a hedging mechanism). Importantly – Slawek and Luke are aware of market fluctuations. If they agree that the cryptocurrency from Slawek will be worth, say, 80,000 after some time, the moment it reaches that value in the market, Luke sells it outright (to prevent the resale value and the value of the hedged cryptocurrencies from converging more closely). Importantly:
Slawek must be secured that he will get all his virtual currencies back in the event of a repurchase,
Luke must be secured that, in the event of a fall in the value of the virtual currencies in the market, he will be able to realise their resale and thereby recover the cash for which the purchase of the cryptocurrencies from Slawek took place.
Of course, both Slawek and Luke cannot predict what the price of a given cryptocurrency will be. Slawek, however, believes that cryptocurrencies will increase in value, so he hedges his course with the mechanism of repurchase opportunities. Luke, on the other hand, wants to buy cryptocurrencies at the current exchange rate, because he also has hopes that they will increase in value. Nevertheless, he allows for the idea that the other party may repurchase, which will also result in a profit for him.
Slawek transfers his cryptocurrencies via the OTC system. These go into a dedicated wallet used to secure the transaction. In this way, if Slawek were to go awry and wanted to buy them back, it is possible to transfer the cryptocurrencies directly to him. Luke, on the other hand, would receive his funds in fiat currency.
The object of the agreement is to sell virtual currencies, with the funds technically secured and the right of repurchase included.