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By Chris Bradbury
Strategies for Acquiring More Crypto Assets
Traders who want to accumulate more cryptocurrency assets, can explore strategies that focus on increasing their holdings without being too concerned about the current price of the asset. So, for those holding Ethereum, the focus often shifts away from tracking dollar prices. These strategies emphasize the acquisition of more Ether rather than fretting over its market price. There are a number of different strategies, dependent on such factors as risk tolerance, or if you're focused on the dollar denomination of your portfolio, and so on.
Stablecoin Strategies
This is a way to earn without taking much risk. Stablecoin strategies involve lending stablecoins on platforms like Aave or Compound. Such stable and reliable platforms are considered low-risk options due to their long track records. On such platforms, traders can earn interest (typically around 2-4%) on their stablecoin holdings.
DSR (Dai Savings Rate)
For those trusting in the stability of the Dai stablecoin, the Dai Savings Rate (DSR) is one of the lowest-risk DeFi lending strategies around. Part of the MakerDAO ecosystem, the DSR provides incentives for holding and locking up Dai. The interest rates are not fixed and can fluctuate based on the MakerDAO ecosystem's requirements and conditions. Given Daiās track record for weathering market shocks, the DSR allows users to earn interest with confidence.
Yield Loops and Leverage
Yield loops involve lending, saving, and borrowing, multiplying exposure to earn more. Users take advantage of interest rate differentials between borrowing and lending assets to generate profits. This is similar to traditional financial arbitrage but executed within the DeFi ecosystem.
For example, you might borrow USDC at 4% interest, while your savings in Dai are yielding 5%. The 1% difference can become, say, 10 times more with the right choices of platforms and timings for execution. This strategy brings a little bit more risk, however. If the borrowing rate for USDC increases to 6%, you're now losing for that period. With this strategy, traders can earn higher returns, but it comes with added risk, such as the possibility of liquidation if the borrowing rate increases.
Active vs. Passive Strategies
Some strategies require active monitoring, while others are more passive and āset-and-forgetā. The strategies mentioned here that depend upon borrow rates remaining lower, are not quite āset-and-forgetā. However, traders can generally let them run if they keep a close eye on the average, even though there may be some days where theyāre technically losing money as the rates fluctuate.
The more active strategies often require regular monitoring, sometimes even daily or hourly. These strategies involve actions like taking long or short positions on different tokens, especially when compared to stablecoins. For example, you might choose to go long on Ethereum against Dai or USDC, or short on Ethereum against USDC. Your decision depends on your assessment of the market's direction.
While centralized exchanges offer these capabilities, DeFi provides advantages, including self-custody and fee reduction. However, DeFi does involve gas fees, and you need to decide which blockchain network is best suited for your needs. You also need to assess your risk tolerance, considering both smart contract and network risks, based on the collateral you hold.
Ultimately, it's about deciding whether you prefer the security and stability of well-established options or are willing to experiment with newer, potentially more cost-effective solutions like Optimism Arbitrum.
L2 Solutions and Gas Fees
Layer 2 (L2) solutions can significantly reduce gas fees compared to using the Ethereum mainnet. However, there are some trade-offs to consider. L2 solutions may not always have robust security measures or fully decentralized sequences.
For users with smaller transaction volumes, L2 solutions are often more cost-effective. But if you're dealing with larger volumes, maintaining the security of the Ethereum mainnet might be preferable.
In DeFi, you have the opportunity to use leverage to increase your exposure easily, either going long (betting on an asset's price rising) or going short (betting on an asset's price falling). These platforms allow you to borrow funds from the underlying protocol, such as MakerDAO (referred to as "RV" here). However, these strategies require active management.
There are tools available, such as on Summer.fi, that offer automation to help protect against losses. You can set stop-loss orders, limit your losses, and use automated buy and sell orders. For example, you can set a target of 3x exposure and automate adjustments when the price moves, ensuring that you're always at that target. This active management approach carries higher risks but can also yield higher rewards compared to simply borrowing or lending assets like Ethereum.
There are liquid staking tokens out there that are already offering leveraged yield, maybe at three times or more. With this, you can potentially increase your expected returns by participating in yield farming. For example, against Ether, you can leverage your yield farming strategies. However, it's essential to note that when doing this, you're adding an additional layer of smart contract risk on top of the existing risks. While the potential rewards might be higher, it's crucial to carefully weigh the risk-reward trade-off.
In DeFi over the last six months, there have been various strategies for traders to earn. These strategies aren't strictly limited to lending and borrowing but encompass more innovative approaches. One emerging area is real-world assets, such as tokenized assets linked to real-world objects. These assets open up opportunities for clever interactions with lending and borrowing protocols. This field is expected to grow, although it's still in its early stages.
In summary
The choice of strategy depends entirely on the traderās goals and risk tolerance, as well as on market conditions. Do you aim to accumulate more of an underlying token, whether stable or volatile, with minimal management risk, or are you willing to take on additional risk and management complexity in pursuit of higher rewards?
In the current market conditions, often characterized as a "crab market" with sideways price movements, many users are opting for strategies involving borrowing against liquid staking tokens. This has become a highly popular approach across various DeFi protocols. However, some users still prefer borrowing stablecoins or tokens depending on whether they're bullish or bearish on the price of assets like Ethereum, Wrapped Bitcoin, or Bitcoin.
Some users focus on profits and losses denominated in Ether terms, ignoring the USD price. This approach is typical among long-time crypto enthusiasts who have experienced multiple market cycles. They believe in the long-term potential of assets like Ether or Bitcoin. In contrast, some investors who entered the market more recently, around mid-2021 or late 2021, might be facing significant USD losses. In such cases, simply accumulating more assets may not be feasible.
Regardless of your chosen strategy, two golden rules apply. First, define your exit point when entering a position, especially in trading. This helps prevent excessive greed and ensures you have an exit strategy in place. Second, be wary of opportunities that seem too good to be true. Unfortunately, there are still many scams and risky lending platforms in the DeFi space. If an opportunity appears too attractive, it's often wise to exercise caution and not get caught up in the hype, as it may already be too late to capitalize on such opportunities.
Author Bio
Chris Bradbury, chief executive officer of DeFi capital management protocol Summer.fi (ex Oasis.app). Chris is an experienced product lead, who is passionate about helping teams create products that users love and use everyday.
After graduating in Engineering, Chris started his career by working in various fintech companies and startups initially as a software developer and then product manager. He joined the Blockchain and DeFi space in 2018, when he took the role of product manager for Maker Foundation (MakerDAO), eventually becoming product lead for Oasis.app to create real usage for Dai and Maker Vaults.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.