The crypto market is known for being volatile and certainly is not for the faint of heart. When reaching the bottom of a crypto bear market, the advice you’ll often hear is to sit tight and wait for a bullish run – but investors with the right knowledge and experience in DeFi can still maximize returns and protect themselves from extreme exposure to volatility. Welcome to the second part of our series on how to navigate a crypto bear market.
In volume I, we focused on the importance of managing your emotions and sticking to a plan – no matter what chaos ensues. We also discussed some simple strategies for reducing risk and minimizing losses, such as diversifying your portfolio to stable or blue-chip assets. Now, we will delve deeper into the world of crypto investing. These advanced strategies may be more complex and come with a higher level of risk due to the composability and interdependencies of DeFi protocols and assets. However, they also offer the potential for higher returns.
To implement these strategies successfully, investors need a good understanding of the DeFi ecosystem and the rewards and risks associated with different protocols and assets. Whether you are an experienced crypto trader or just starting out, the strategies in this blog will help you make more informed, confident decisions so you can keep the bears at bay. Let’s get started.
Intermediate passive strategies
Yearn CRV Staking is a passive investment strategy that allows you to earn a share of the revenues generated by the Curve protocol while also preserving your liquidity. By staking your CRV tokens on the Yearn platform, you lower the token's circulating supply and help to secure the protocol – which supports the Curve ecosystem. In return, you will earn a proportional share of the protocol's revenues, which will be automatically compounded and added to your staked CRV balance.
One of the key benefits of this strategy is that it allows you to earn rewards on your staked CRV tokens without sacrificing your liquidity. This is because Yearn issues you a wrapped asset in return, yCRV, that is issued 1:1 to CRV and represents your locked CRV through Yearn. You can choose to unstake your yCRV tokens at any time and sell them on a decentralized exchange, thus allowing you to access your funds and use them for other purposes if needed. This makes it an attractive option for investors who want to earn passive income from their CRV holdings without committing to a long-term lockup. Despite these advantages, there are also some risks associated with this strategy:
- The value of CRV tokens and the revenues generated by Curve can fluctuate, so there is no guarantee of how much you will earn from staking CRV.
- You are exposed to the technical or operational issues of both Yearn and Curve. If either protocol experiences problems, your entire investment may be at risk.
To implement this strategy, you will need to stake your CRV tokens on Yearn. You will also need to be familiar with the Yearn protocol and understand how staking works on the platform. Once you have staked your CRV, you can sit back, relax and let the platform do the work for you. For more experienced DeFi users, you can further mitigate your price exposure by depositing stablecoins as collateral on a cross-margin lending platform like Aave to borrow CRV at a healthy loan-to-value (LTV) ratio. You then stake the borrowed CRV in Yearn to start earning rewards. However, this is a slightly more active strategy as you have to monitor your loan’s Health Factor since your stablecoin collateral is at risk of being liquidated if CRV appreciates above a certain threshold.
Intermediate active strategies
One ray of hope amidst the crypto apocalypse that has claimed several exchanges as victims has been the increased usage of decentralized exchanges like GMX and a greater focus on protocols with sustainable tokenomics.
GMX is a decentralized perpetual contracts exchange that is gaining popularity among investors and traders due to its strong tokenomics. The protocol has a unique fee-sharing design that rewards GMX stakers and GMX liquidity providers (GLP) based on the trading activity on the platform. GLP holders provide liquidity to the GMX platform by depositing whitelisted assets into GMX to own a proportional share of a crypto asset collection, including BTC, ETH, stablecoins, and more. The platform distributes 30% of all protocol fees to GMX stakers and the remaining 70% to GLP holders. Here, yield is mainly paid out in ETH (on Arbitrum) and AVAX (on Avalanche), which has popularized the crypto Twitter trend of #RealYield.
Since holding GLP is similar to holding an index on the crypto market, you may experience potential losses if the value of the assets in the GMX basket decreases. Additionally, GLP holders are exposed to risks, including:
- Smart contract vulnerabilities, hacking, and governance issues.
- GLP serving as the counterparty for trader wins and losses (generally, the house always wins, and we see this in the historical trader P&L).
- Note: it is feasible for a large trader to execute a successful trade and drain the pool. As always, you should keep an eye on the market conditions and be prepared to adjust your strategy as necessary. For example, if the value of the crypto market declines further, you may want to consider unstaking your GLP and reallocating your funds to other assets.
#DYOR and be flexible
Remember – always do your own research so you fully understand what you are investing in, and when things change, normalize re-evaluating your investment thesis. By staying informed and being proactive, you can maximize your returns and protect your portfolio in a bear market. At Exponential, we are committed to providing you with insights and information about the inner workings and underlying risks associated with every DeFi investment.
In our next and final installment, we will highlight some of the most advanced DeFi strategies available today. As always, keep calm and #DegenResponsibly.
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