5 Tips for Surviving a Bear Market

The crypto market is fully in bear territory now, even though we have seen some relief over the past few days, with Bitcoin and Ethereum rising again, and a number of DeFi project tokens seeing double-digit percentage rise. For many of us in crypto, this is not the first time we’ve been in this position. We know that the market is cyclical, and that this time round macroeconomic influences are more influential, especially with a recession looming.

So, if you’re a crypto holder, what should you do? Should you sell or buy the dip? Or take some other action? Here is some advice from market watchers.

1. Take some profit

HODLing is widespread in the crypto community, but Tyler Reynolds, a Web3 investor advises selling a percentage of your gains at this time, rather than just sitting on your investment, or selling it all. An anonymous trader also said, “Set sell targets/take profit levels in advance, at least loosely, and stick to them. Your objective self from the past is a better guide than your euphoric self in the future.”

2. Do not panic sell

Its better to take some profit, or devise a strategy for exiting the market completely, but don’t panic sell says Fedor Linnik, an NFT builder. He added, “being greedy and being afraid to miss the top” was a mistake he made in 2018. Make your selling decisions based on data, not on emotion or on advice from social media.

3. Don’t try to ‘make it back’

Alex Svanevik, CEO of data analytics firm Nansen, said that those who invested in 2020 and benefited from the highs of 2021, need to realise the fun is over for now. He warns against entering highly risky trades to try and make back losses.  A trader tweeted, “Don’t trade or invest with the mindset of ‘making back’ what you lost in the bull; it’s an inherently flawed comparison.”

4. Research projects

Use this bear market time to look at crypto projects, new or old. Tyler Reynolds said that what worked for him during the last bear market was to keep investigating both new and old projects. “You will need to keep re-investigating as projects pivot from their original idea and find a much better product-market fit, like Aave.”

5. Get involved with crypto projects

Many crypto projects, especially those in DeFi, are structured as decentralized autonomous organizations, or DAOs. Anyone can join and participate, and if you are a developer looking for a job in crypto, it can be a good way of finding one.

NFT Lending is Trending

A marketplace called NFTfi, which specialises in loans collateralised by NFTs, has seen a surge in lending volume over the last two months. During the weekend of 3rd July, it hit its highest level with $3.5M worth of non-fungible tokens changing hands. However, we have to look deeper to find the real story.

Richard Chen, a general partner at crypto investment firm 1confirmation, took a look at it and discovered something important. Of that $3.5m, the sum of $3.16M was borrowed by just two whale investors, although there are many on crypto Twitter who doubt that it is two people, and suggest it is a single investor.

The ‘two’ investors borrowed 21,500 DAI against a combined collection of 147 CryptoPunk NFTs. The interest rate on the loan is set by a metaverse-based interest rate protocol called MetaStreet, which acted as sole lender for the loans.

NFTfi specialises in short-term loans, with loans lasting 33 days on average. The interest rate on that period of time is around 4%, which equates to 42% per annum. As might be expected, Bored Apes and CryptoPunks dominate the NFTs offered as collateral.

There is now a rumour floating around that this flurry of activity on NFTfi will launch an airdrop for users. Andrew T of wallet analytics firm Nansen tweeted that NFTfi has been quietly raising funds over the last three months, equivalent to $1m in USDC. He tweeted, “Between that and this possible airdrop farming, could be a token on the horizon.” Others aren’t so sure, with some suggesting there is a pattern at play that looks more like money laundering.

NFT lending is soaring

Whatever the truth of that, NFTfi as a business has been doing extraordinarily well in the NFT lending sector. Since it launched in 2020 it has facilitated 13,402 loans worth $217.6m. It even managed to buck the downward trend of the crypto market in 2022, processing a record $48.7M worth of loans in April, although as market conditions became more strained, volume dropped, with only $15.8M worth of loans being taken out during the month of June.

NFTfi’s excellent results over two years have of course prompted other protocols to enter the market. Arcade, which raised $15M in a Series A funding round in December is one of them and has facilitated $25m worth of loans since it went live in January this year.

Emergence of peer-to-protocol lending

Gmoney, a prolific NFT collector, says that while more protocols are coming along that offer peer-to-peer loans backed by NFTs, the next frontier for NFT lending will be “peer-to-protocol lending.” In a podcast with The Defiant, he said, “At the moment, there’s no peer-to-protocol lending, it’s more peer-to-peer. I think the issue that people are trying to solve is how do you make it a peer-to-protocol lending environment… I know a lot of teams are trying to solve this problem.” Indeed, Messari reviews JPEG’d which offers a token-integrated peer-to-protocol approach, and that because of its utility-driven tokenomics, the demand for the JPEG token is correlated with demand to “maximally utilise the platform.” It will be interesting to observe to what extent peer-to-protocol overtakes peer-to-peer NFT lending, and why.

The Battle Between TradFi and DeFi

Heap of dollar bills eyeglasses and Bitcoin coins. Cryptocurrency analyzing concept

You may have seen numerous articles about decentralized finance (DeFi) and its claims that it will radically change the traditional finance (TradFi) sector. DeFi supporters state that there is a core need for an open, transparent, and secure financial system, and that TradFi simply doesn’t provide that. Essentially, DeFi positions itself as an alternative to the banking system we currently have.

One of the arguments for DeFi is that because it is a blockchain-based concept, it is outside of governmental and regulatory control. This has a strong appeal to those who are concerned about what we have learnt about personal data collection by commercial entities and governments.

DeFi answers the desire for data security and privacy. It also “leverages a set of progressive, agile tools to give control to users,” according to Stably. It also offers features that traditional finance can’t provide, and this makes it an attractive alternative to the current system.

But what are the real differences between DeFi and TradFi? There are three key differences:

  1. In DeFi the public blockchain is the source of trust, whereas in TradFi it is regulatory bodies that are the source of trust.
  2. DeFi is gaining traction because it is open and transparent, and there are fewer barriers to accessing it. The opposite is true of TradFi, especially in terms of the barriers to access, which leaves billions of people unbanked worldwide.
  3. TradFi has its hands tied by regulatory forces, which makes it extremely difficult for its institutions to act with the same agility as DeFi projects.

DeFi’s use cases

There are also three strong use cases for DeFi.

1. Banking

Unlike TradFi, DeFi projects are able to offer banking without borders. TradFi struggles with this, and as mentioned before, this has left billions globally without a banking service. DeFi’s use of blockchain technology overcomes that issue and allows people in developing countries and rmote areas with access to banking via their mobile phone.

2. Circumventing oppressive governments

Oppressive governments are prone to issuing bans and restrictions on financial movement. TradFi can’t offer solutions, but again, because DeFi uses the blockchain and associated tools, it is able to circumvent government restrictions and provide uncensored global financial services.

  • Creative finance

There is a level of creativity in DeFi projects in terms of developing new features and functions. In the past TradFi had a monopoly on financial products, but even those products associated with TradFi can be moved over onto the blockchain, giving DeFi another advantage.

Challenges to overcome

Naturally, while DeFi has advantages, it doesn’t have a clear home run. It also faces challenges.  The biggest one is not hard to identify, and you don’t need to even ask an expert: it is getting the general public to trust the idea of unregulated open-source code. Cryptocurrency doesn’t yet have mass adoption and there is widespread mistrust of it, which bleeds over into the DeFi sector by association. There are fears about hacks amongst other things. Indeed, the DeFi tech is still in its infancy, with much work to be done to make it more trustworthy for a wider audience beyond DeFi fans.

Ultimately, DeFi has a way to go, but it undoubtedly has potential, and certainly as a way to give more people access to banking services. If its works hard on scalability, security and liquidity, it has a real opportunity to replace TradFi.

Dazzled by some insanely high APYs?

Have you noticed that a significant number of DeFi projects are offering insanely high annual percentage yields (APY), which, of course, look very attractive to investors, especially retail investors, who are those most at risk.

There are DeFi protocols that have been built using the proof-of-stake (PoS) consensus protocol offering eye-watering returns to their investors in return for them staking their native tokens. But, as most of us know, sometimes by getting burnt ourselves, if something sounds too good to be true, then it probably is.

The issue is that some projects are nothing more than cash grab schemes. Shiraz Jagati at Cointelegraph gives the example of YieldZard, a project positioning itself as a DeFi innovation-focused company with an auto-staking protocol, which claims to offer a fixed APY of 918,757% to its clients. Who finds that believable? All you would need to invest is $1000 to gain a return of $9,187,570! And YieldZard isn’t the only project offering fast and high payouts.

Assessing an APY

How can you as an investor assess the sustainability of projects like this? Here is some advice from Kia Mosayeri, product manager at Balancer Labs — a DeFi automated market-making protocol. “Sophisticated investors will want to look for the source of the yield, its sustainability and capacity. A yield that is driven from sound economical value, such as interest paid for borrowing capital or percentage fees paid for trading, would be rather more sustainable and scalable than yield that comes from arbitrary token emissions.”

Ran Hammer, vice president of business development for public blockchain infrastructure at Orbs, pointed to the fact that DeFi offers a another major innovation to the crypto ecosystem: the ability to earn yield on what is more or less passive holding. But as he says, not all yields are equal by design because some yields are rooted in “real” revenue, while others are the result of high emissions based on Ponzi-like tokenomics.

Understand the source of the ‘yield’

Ultimately, it is very important for investors to understand where the yield is coming from. For example, transaction fees in exchange for computing power, trading fees on liquidity, a premium for options or insurance and interest on loans are all “real yields.” Whereas those that are based on token inflation may turn out to be less sustainable, as there is no real economic value funding these rewards. 

So, if you see a dazzling APY offered, you should consider all of the above, as well as the fact that most returns are paid in cryptocurrencies, and since most cryptocurrencies are volatile, (just look at the market this week!) the assets lent to earn such unrealistic APYs can decrease in value over time, leading to major losses.