Bear markets are stressful, especially for crypto. You obsessively check your portfolio. Grit your teeth as prices spiral down. Rubik’s-cube every action you could possibly take while weeping softly. This headspace can drive investors to make irrational decisions – like recouping losses with one risky trade (revenge trading) – or bailing entirely. As with all crises, the last thing you should do is panic. Bear markets can present rare opportunities to accumulate long-term holdings as well as generate yield — if you know how to find them. In this series, we will discuss a few strategies available to DeFi investors – ranging from simple passive ones to complex, active strategies.
First, some important context to keep in mind. The DeFi movement was born in the midst of a bear market. Much of the core innovations that have shaped the landscape today were built when crypto prices were at their lowest. Then came the “DeFi Summer” in 2020, when markets finally started to reverse and explode upwards, leading to enormous growth in the present day. There are now several options for profiting during a bear market, but these strategies are not without risks. Ultimately, it’s up to you to decide which risks are worth taking based on your individual risk appetite. In this post, we will focus on two examples of low-complexity strategies.
Stablecoins are essential during a bear market. They are a stabilizing force in a sea of high volatility of crypto assets while still earning rates that can comfortably beat inflation. Stablecoins are intended to be non-volatile assets but are not completely risk-free.
The Uniswap USD Market Making strategy allows users to earn swap fees for every user who trades between USDC and BUSD in the pool. This pool earns a 1bp fee for every swap. Uniswap is an automated market maker (AMM) that crowdsources liquidity to create isolated trading markets. In return, liquidity providers (LPs) earn trading fees paid in the underlying token pair (i.e., USDC and BUSD).
One of the main issues with AMM pools is the risk of impermanent loss or price divergence between the two assets. The more the prices diverge from when you entered the pool, the more costly it is to you. In this case, the two underlying assets are both stablecoins whose values are pegged to 1 USD. This means the risk of impermanent loss is low and does not require active management. Simply deposit similar amounts of both tokens around the 1 USD price range to start passively generating yield. The returns on this pool over the last 30 days have netted users over 14% APR.
Alternatively, if you want broader exposure to the crypto market or have a longer-term view, you can dollar-cost-average (DCA) into assets like BTC and ETH. The beauty of DeFi is that investors can automate this process and continue to still earn yield.
The Curve Tricrypto Market Making strategy operates similarly to the Uniswap one we discussed above. The main difference here is that the underlying assets consist of BTC, ETH, and another stablecoin (USDT). This pool maintains a constant ratio between all three assets at ~33% share. You can enter the pool by supplying equal amounts of all three assets or depositing one asset (Curve will automatically split the assets into equal shares). Tricrypto is best suited during crab markets when prices are volatile but generally trade within a range. The longer prices remain within a band, the more yield or swap fees you earn to overcome any loss due to price divergence.
You’re at risk of impermanent loss when prices fall, as AMMs will always sell the outperforming asset. In this case, it would sell USDT to accumulate more ETH and BTC. This can actually be viewed as a pool feature if you intend to DCA into ETH and BTC at lower prices. Conversely, when prices rise, the pool will sell its ETH and BTC to accumulate more USDT. This can be thought of as the pool automatically taking profit over time. In general, this strategy requires more active management since you have to manage the impermanent loss relative to trading volume.
Fear and greed are strong emotions that can take over, leading to short-sighted decisions. That’s why it is so important to lay out a plan when you’re thinking clearly and stick to it even when there’s turbulence. At Exponential, we are working to expose the underlying risks associated with every DeFi investment so you can make informed decisions.
For our next installment, we will take a deeper dive into more advanced DeFi strategies. In the meantime, keep calm and #DegenResponsibly.
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