Have You Noticed?
If you have been operating in the DeFi space utilizing stablecoins in order to earn yield, you would have noticed how much the rates have decreased. Although rates are down across most of the DeFi space, stablecoin returns on DeFi platforms are down rather significantly. The drop is so significant that the risks far outweigh the returns, that is why I have removed the majority of my stables from DeFi vaults and am making use of this very simple, yet efficient strategy. I recently wrote an article, in which I addressed combining DeFi and CeFi opportunities in order to generate income, as well as additional assets.
This sparked a new school of thought, which caused me to realize that CeFi actually had way more to offer but only if utilized correctly. Locking up your stables for 8.88% per year is pretty good, especially when compared to your local bank. However, we are not using traditional finance as a benchmark, as the returns are basically useless. Unless you are a billionaire, you are going to earn next to nothing by depositing your money with your local bank. As Crypto enthusiasts, we are a little bit more demanding than that. The returns need to be significant , otherwise we don't play! That's how it is for me anyway and if the risk is fairly low, I am willing to lower my expectations. It is all relative and the risk to reward ratio needs to make sense.
The Correct Approach
When users deposit coins in order to earn interest, most simply collect their monthly or weekly rewards in the coin that they have deposited. There are more options available and perhaps some users are not aware of these other alternatives. For instance, when using BlockFi, you can select to have all your interest paid out in BTC. I personally have a small amount of BTC and ETH on BlockFi, which earns me interest in BTC. I set my default earnings payout to BTC, which means that even if I hold all the coins available on BlockFi, I will receive all my interest in BTC.
With Celsius users can choose to have all their interest paid out in CEL token if they so wish. Nexo also offers a similar opportunity that actually enables you to earn a higher percentage yield. This is where the planning and timing comes into the strategy. Due to monetary expansion, any investment you may choose to hold now needs to appreciate by at least 22% in order for you not to lose value. In other words earning 9% per year on your stablecoins is going to put you in a negative position even though in essence you are earning more. So when markets are reasonably bullish, you will want to have some exposure to BTC or alts but may want the security of stables.
This is when you would set your earnings to be paid out in BTC or ETH. In the case of Celsius you would want to earn your interest in CEL. By doing this, your holdings remain secure in dollar terms and your interest is accumulating in an asset that is increasing. Whether you are earning BTC or even CEL, your interest is now able to grow in dollar terms.
In some respects, your interest could alone become more valuable than your initial investment. Celsius is a great example to bring this point across. Imagine you were collecting your rewards in CEL when the token was trading at a couple of cents. Looking at the graph below, it becomes clear that earning CEL in 2018, 2019 and 2020 was a very beneficial move.
In a scenario like this, your interest will most definitely be worth more than your initial investment over time. The price hovered around $0.04 for most of 2019 and the end of 2018, so if you earned 8.88% on $1000 back then it would be worth a packet now. You would have earned approximately 2220 CEL in a year during that period, which would be worth approximately $15 300 currently! Receiving your interest in stablecoins would have been an absolute loss compared to an asset that has the ability to appreciate in value, such as CEL. This also excludes the compounding of 4.86% on your CEL tokens, once received. This approach allows you to hold your value in stables and generate long-term gain.
On the flipside, if the market shifts into a bear market, it will make sense to rather receive your interest in stables due to the fact that BTC and CEL will be dropping in value over an extended period. Stables earned during this time can then be used to purchase alts or BTC once the market bottoms. In a similar way, greater value will be added to your interest earnings over time, as the market rises. Once again your initial investment will be locked in stables but your newly purchased alts or BTC will be increasing in value.
Doing the right thing at the wrong time does not help much at all! One needs to do the right thing at the right time, in order to maximize gains over time. Don't fall for the general opinion that holding stables is unprofitable, or a waste of time. Executed correctly, it can be very profitable.
As always, this is not financial advice and you should decide on your own approaches once you have done your own research and are comfortable with the potential risks involved.
