The “Professional” DeFi Investor

A New Chapter

DeFi is pretty much the last sector you want to be exposed to during a bear market. This is predominantly due to many exiting the space, as well as selling pressure from those who remain. Personally, I advocate a strategy of compounding rewards during a bear market, as opposed to selling rewards in order to realize gains. That is if you choose to remain exposed to the space during a bear market.

Recently, I addressed the best way to go about DeFi investing, at least in my opinion. When one puts together a strategy, one has to factor in profitability, risk, and security. The majority of investors tend only to look at the aspect of profitability, and here lies the biggest problem. Risk management should be the primary objective, while profitability, second. I address this in one of my previous articles entitled, “Investing – The Dual Objective”.

This sounds counterintuitive in theory. However, it’s not. You have to remember that in the world of investments, and especially DeFi, your collateral is your business. No collateral means no business! Every effort should be made to protect your collateral, while simultaneously utilizing opportunities that offer good or acceptable returns. This will of course require a bit of research, and assessing previous price performance.

Choosing to throw caution to the wind just because the APR of a particular DeFi opportunity appears amazing is not the wisest of moves. Losing a significant chunk of your collateral can ruin your business, as it will most likely require an extended period of sacrificing income, in order to recover. After all, even DeFi projects that are successful can be rather volatile, and that means compensating for those times when valuations are low.

DeFi Income Is As Volatile As The Price Action

This can be a tremendous issue for someone setting up a DeFi business. Essentially, one has to ensure that their average income is in fact a lot higher than what they require. Compensating for price volatility, which will ultimately affect income, is a rather important aspect for anyone choosing to rely solely on DeFi income. This is why having a form of “DeFi savings” is a good idea. One can even make use of something like HBD, due to its stability.

Essentially, savings or a “rainy day fund” needs to be in the form of something stable, and not prone to volatile price movements. Something like HBD is a rather attractive option, as the APR is pretty good too! An investment yielding 20% APR with moderate to low risk is a good deal. These are all things a professional DeFi investor needs to consider. As mentioned previously, a DeFi business is rather seasonal… similar to an ice cream business located on the beach.

Seasonal Income

Unless you are working with an exceptionally large amount of capital, another area that requires a level of preparation, is the aspect of seasonal income. A significant drop in income during a bear market is a real concern. That’s why choosing to compound rewards or exiting the market altogether is not a bad idea. However, that creates an extended income gap that needs to be compensated for somehow.

One option is a second “rainy day fund”. However, this one needs to be way more significant. In other words, if you are able to generate 30% to 40% more than you require during a bull market, you can simply put that away as your income during the bear market. Bull markets tend to last longer than bear markets. In other words, markets generally spend more time appreciating than they do depreciating.

If you truly believe in the projects you have selected, then you can simply compound your earnings during a bear market, while utilizing your previously saved earnings as income. In this way, when the next bull market comes around, your business has grown. However, this is only true if the projects go on to recover, and don’t just fade away. These are unfortunately the very real risks that make up the DeFi market.

Final Thoughts

Putting together a DeFi strategy that is actually going to work is a lot more detailed than many may think. I have addressed some of the more important aspects to consider when starting a DeFi business. There are, however, a number of additional aspects to take into consideration. However, by paying attention to these, you are likely to come across those during the planning stages. That’s it for this one. I must say I am beginning to get rather excited about a new bull market… we are not there yet, but each day brings it just that little bit closer. Catch you next time!

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