99% Of You Will Ignore This...
You can make more money doing this instead in a bear market
Making money in a bull market is simple, and everyone thinks they’re geniuses. Investing is easy when you can drop a portion of your capital into almost anything and see your portfolio grow.
However, things change very drastically during bear markets. Market participants are less inclined to take risks, and no one is ape-ing into random shitcoins anymore. So, how do we make money during this time to outlast a bear market?
There are multiple strategies you can use to outlast a bear market, and they depend on your appetite for risk:
Stablecoin yield farming (USDC, USDT, UST, etc)
Staying in the majors (ETH, BTC)
DeFi yield farming (alt coins)
Running a Play-to-Earn (P2E) strategy
Each strategy has its pros and cons, which we outline later in the article. While we do our best to remain neutral in our analysis of the strategies, our house view is that starting and scaling a P2E guild is one of the best ways to provide the highest risk-adjusted returns in a bear market.
Let’s look at a simple 2x2 matrix to show how these four strategies line up:
The main argument for P2E being a superior strategy lies in the risk-adjusted returns that small/medium investors can achieve despite investing alongside whale investors. While whale investors can still move markets within P2E games, they have their incentives aligned with their participating games.
This creates a lower probability of harming the P2E games’ price, which is beneficial for all participants.
Boring But Stable
One way to outlast the bear market is to hold on to enough liquidity and start investing in riskier coins once market sentiment turns more favorable. In this strategy, we would rotate our portfolio into stablecoins such as USDC, USDT, UST during the bear market and rotate it into other coins once the bear market is over.
However, holding onto stablecoins and doing nothing with them is not the best way to utilize these assets. It's like taking cash and putting it under the bed while waiting for a good time to start reinvesting.
Instead, we should look at stablecoin farms that provide returns in stablecoins, such as centralized exchanges. Those such as Binance and Crypto.com offer between 8% - 12% annualized returns on your stablecoins such as USDT or USDC1.
There are other protocols on specific chains, such as Anchor on the Terra chain, which provides a 19.6% annualized return on UST.
Being boring and stable might be a good way to survive the bear market. But, we would need to have good timing to rotate back into other tokens once the bull market is back on. Plus, making ~8% to 20% yearly returns on your capital might sound good from a TradFi perspective, but it pales in comparison to returns made from the riskier crypto asset class.
A Bigger Safety Net
Another strategy to outlast the bear market is investing in coins with staying power. A concept in TradFi is “flight to quality.” In our case, investors want exposure to blue chip tokens such as Bitcoin or Ethereum, which have achieved a Lindy Effect2. Bitcoin and Ethereum are tokens that have survived multiple bear markets.
Other investors who want to play it safe but still be a bit more aggressive on risk will also hold tokens like Binance Coin, Avalanche, Solana, and Luna. These coins have a track record of massive adoption over the past two years.
Given the massive liquidity locked up on these chains and a considerable number of dApps built on top of them, investors believe these chains will still be around for the foreseeable future. Holding these tokens will provide a safety net during the bear market.
There are ways to juice up the returns while holding these blue chip tokens. Lending platforms such as AAVE offer ~1-2% yields for lending these tokens. Centralized platforms allow you to stake these blue chip tokens to earn ~1%-6% yields on them as well.
Holding blue chip tokens as part of a larger portfolio allocation strategy is a smart move. However, maintaining 100% exposure to blue chips will not provide the outsized returns that a crypto investment would generally give. Maintaining some level of exposure to blue chip tokens is an excellent strategy to incorporate with your safety net.
DeFinitely subjected to the whims of whales
The more degenerate strategy during the bear market (read: Higher Risk Level) is to farm on DeFi protocols (farms) by staking stablecoins or the native token on their platform. While the returns on these farming options might look juicy (mid teens to high three-figure APR%), investors often forget that the return is based on the price of the native token given as a reward.
An example is farming on the TraderJoe platform. Investors can stake pairs such as AVAX-JOE or JOE-USDC to earn 97% - 205% per year. The interest paid out is through the $JOE token, and this reward number fluctuates as the price of $JOE moves up and down.
DeFi farms usually show higher return figures because they want to incentivize investors to buy the tokens that are being farmed. For example, Mad Meerkat Finance on Cronos offers 300%+ annualized returns on their MMF-X pair tokens but less for other pairs such as CRO-X.
One of the reasons for doing so is because the protocol needs to attract buyers for the MMF tokens to keep their price high and continue offering high returns on their token (remember: the reward is based on their token price since they reward farmers in their native token).
However, high returns on farms usually attract hordes of investors into the farmed pairs. This causes one of two things to happen:
Protocols will adjust the APR%/ APY% figures to prevent overfarming and manage token emissions.
Investors will start dumping farmed tokens for stablecoins to secure their returns.
Scenario 2 happens more during bear markets, as investors are worried about holding non-stablecoins and non-blue chip tokens. Furthermore, investors are not loyal to anyone but themselves. This means that mercenary capital from these investors often farm, dump quickly, and move onto the next DeFi farm.
DeFi farms are also heavily influenced by whales that farm large amounts of reward tokens before dumping them. We’ve seen many cases of DeFi tokens being farmed and dumped - see the charts below.
Early investors are also the ones that benefit the most from DeFi farming protocols, as they benefit from substantial APR% figures (given to incentivize investors when locked liquidity is low) and also through the token price increasing when more people start buying the token.
Furthermore, most DeFi protocols have tokenomics that divide a significant amount of their emissions for token rewards. Hence, one would not be too far off if one claims that DeFi farms have the characteristics of Ponzi schemes.
In addition, Defi Farming brings a significant amount of risk to attacks. Last December, Cover Finance was hacked by DeFi devs, who later returned a portion of the money with a message to “take care of their own shit.” This occurred when hackers exploited an “infinite mint” bug and minted millions of dollars in fake tokens they then staked and ultimately dumped into various exchanges.
While DeFi might look like a great way to earn returns over the long run, we would caution investors to shy away from it. There are better sectors to explore, which gives a better risk-adjusted return.
What makes you more money? Trading, or building? - @santiagoroel
Play-to-Earn-to-Win
A better strategy (than DeFi) during a bear market is participating in the P2E ecosystem. This is a more optimal strategy than DeFi farming in both the bear and bull market for the following characteristics:
Games have captive audiences in the form of players that are actively playing the games.
This is unlike DeFi farms, where it is purely passive.
Passive games like Crabada, Pegaxy, or Ninneko involve some form of strategy through picking teams to boost chances of winning. Whereas more engaging games like Legends of Venari, DeFiKingdoms, Gods Unchained require actual attention spent on the game to make thoughtful decisions that impact overall chances of winning. Keeping your brain engaged while playing triggers endorphins and dopamine, chemicals associated with pleasure that “are abundant during game-playing experiences.”
Games encourage some form of competition, through PvP, leaderboards, etc.
This taps into the human psyche, adding another layer of dopamine release.
Games consistently release new content through updates, or through season releases.
While farms are constant in nature and have minimal engagement for the user, games get updated on a regular to semi-regular basis to create new engagement areas and attract more users to provide positive feedback loops. This allows players to feel like there’s always something more to look forward to.
Whales would not be able to manipulate prices as effectively as they could in DeFi farms, given that the limiting factor is time and effort to play the game.
The alternative for these large investors is to create a guild to get around the time limitation.
While whales (usually guilds) also take part in the P2E ecosystem for the earning aspect, these guilds are usually aligned with the protocols (games) that they are earning on, unlike in DeFi, where only whales win.
Given that guilds are looking for games and scholars to play for a long time, most of these guilds will act in a ‘benevolent’ fashion and not in a mercenary manner.
Returns for P2E games are usually pretty significant as the payback period on investment falls between 1-3 months of the initial investment.
This translates to an APR% of 400%, assuming a three month payback on the initial investment, which is roughly in the range of what most (degenerate) DeFi farms are promising their investors.
For smaller investors, this allows them to build consistent returns and expand their portfolios as they earn.
Whereas medium sized investors could scale past the time/effort limitation by onboarding scholars and running small sized guilds.
Investors can also leverage on lending markets such as Kyoko Finance or rent NFTs from the games’ marketplaces which can help scale portfolios quicker.
Final Thoughts
There are many ways to survive during a bear market, but few optimal strategies to earn. If you have a lot of time and energy, trawling through discords and twitter to be first into DeFi protocols can yield significant returns.
If you’d like to spend your attention and energy in a more relaxing way, spending time on P2E games is more optimal and fun use of time.
Consider taking the first step into P2E through playing one of the more established games such as Axie Infinity, Pegaxy, and Crabada.
And when you’ve familiarized yourself with how P2E works, level up by starting a P2E guild and operating it like a boss.
Meanwhile, go sign up for Early Access to GuildOS - a simple, scalable and secure management platform for growing gaming guilds built by Salad.
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This article was co-authored by Felix (@felixsim) and Sam (@0xSloke)
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The Lindy effect proposes the longer a period something has survived to exist or be used in the present, it is also likely to have a longer remaining life expectancy