Crypto Investing Without Risking Own Capital
How to build a crypto portfolio without risking own capital
DISCLAIMER: I AM NOT PART OF A FINANCIAL INSTITUTION, AND THE FOLLOWING SHOULD NOT BE TAKEN AS PROFESSIONAL INVESTMENT ADVICE.
Crypto investing is really hard for risk averse people. The volatility of the crypto markets puts a lot of people off. Even when investing small sums of money that one does not need is quite difficult, mostly psychologically and one must be really future minded to just HODL and let it be.
Fortunately, there is a way of building a crypto portfolio and getting exposition to the future of finance without putting own capital at risk. Here is how.
Liquidity providing
Decentralized Finance (DeFi) platforms have given us a tool to monetize our parked crypto capital. It’s possible to earn interest by providing liquidity to the crypto market. However, liquidity providing comes with a risk that sounds a alien for new participants on the crypto space — impermanent loss.
Impermanent loss happens when you provide liquidity to a liquidity pool, and the price of your deposited assets changes compared to when you deposited them.
https://academy.binance.com/en/articles/impermanent-loss-explained
In short, it means that when providing liquidity to a pair of crypto currencies and the prices change, in some circumstances you could have gained more money just by HODLING them instead of providing liquidity to the market.
So, how to avoid this risk? Provide liquidity to stable coins only(e.g. UST and BUSD):
- the price of stable coins is expected to remain pretty much constant;
- liquidity providing fees will be earned;
- the APR (Annual percentage rate) is significant (especially when compared with the interest the banks are paying nowadays);
DeFi platforms pay the liquidity proving fees with their own token. For example, UniSwap pays in UNIs and PancakeSwap pays in CAKEs. PancakeSwap is paying 23.84% APR on the UST-BUSD liquidity pool in CAKEs.
Not bad, you provided liquidity between two stable coins and you get paid in crypto — better than having the money parked in the bank. However, how do you build a crypto portfolio from here? That’s where Farming and Staking enter.
Farming & Staking
Farming pools allow an investor to earn interest on his crypto currencies by staking them. This interest is paid on a new currency — the currency being farmed. There are plenty of farming pools (Syrup pools on PancakeSwap) where one can stake the CAKEs earned by providing liquidity in order to farm other crypto currencies:
Each pool has its own APR (calculated considering the current market price) and a link to the project of the crypto currency being farmed on the pool. For example, as you can see from the image above the ALPACA pool is paying an APR of 82.77% in ALPACA.
At this point you must put your portfolio building skills to use. In which pool to invest? You must investigate the project, people involved, roadmap and the APR provided in order to decide which currencies you want to farm and HODL.
In short
PancakeSwap and other DeFi platforms allow an investor to earn fees by providing liquidity between stable coins — which is relatively low risk and reduces exposition to impermanent loss.
These fees can later be invested to farm and harvest other crypto currencies. Allowing investors to build a crypto portfolio without investing own capital — all crypto currencies are farmed with interest returns.
The performance of the portfolio will depend on the performance of the DeFi’s platform currency/token and on the projects selected.
Risks to consider
- Stable coins are as safe as their backing — if doubts regarding the backing of a stable coin arise it may become volatile and capital may be lost;
- Smart Contracts and DeFi platforms are a relatively new technologies and are subject to bugs and hacking; this risk is always present;
