Market Meditations | April 27, 2021
What if there was a way to make serious profit all year round? There is.
We’ve seen that crypto markets are extremely volatile. What if there was a way to make serious profit all year round? There is.
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Crypto volatility is a blessing and a curse. Whilst the ability to profit is limitless to the upside, volatility also works against us when the market corrects if we’re not prepared. It’s noteworthy that such market corrections are not inherently bad – in fact we’ve seen even bullish trends are subject to healthy corrections if they are to be sustainable.
? Today, we share our method to make serious profits even when the market corrects.
Compound interest has been described as the 6th wonder of the world. We will begin by understanding why. Not only can you earn compound interest in DeFi but at the moment yields are very high. We show you how you can start earning high yields on your crypto and stablecoins. What’s more, we will consider how stablecoins create a bull market edge.
The Power of Compound Interest
Let’s start with a thought experiment. Picture 2 people. The first person is a software engineer who earns $80,000 a year. He puts $2000 a month into a traditional savings account earning 1% a year. The second person is a savvy investor who earns $40,000 a year. He saves $1,000 a month and uses DeFi to generate 10% a year which for DeFi is quite a conservative estimate. Who is truly on the path to building wealth? Consider their cash flows overtime:
After 5 years, the engineer will have about $3,000 in interest. The savvy investor will have earned $18,000.
At the 10 year mark, the engineer has now earned $13,000 and the savvy investor will have earned about $87,000. That’s a $74,000 difference.
What you’re witnessing is compound interest. Your money makes you money, then that money makes you more money and so the cycle continues. Understanding the power of compound interest can change the course of our financial lives. Everybody is an investor by default, for even if you simply stash cash, that is an investment that loses about 2% a year.
Why Yields Are So High in DeFi Right Now
The DeFi space gives us access to double and even triple digit returns for those who really know what they’re doing. Let’s take a look at four reasons why:
?Removal of Inefficient Middlemen. Where people used to handle your finances and take a big cut for it, we now have computer code that does this.
❌ Inherent Risk of Human Error. We have to trust code written by people, there could be errors in that code. There’s a risk of losing our money and therefore there’s going to be more reward attached to it.
? Difficulty of Use. Often platforms that allow you to earn interest have complex user experiences. This is a barrier to entry that makes it more lucrative for those who can cross that barrier and learn how to use it.
? Cost of Customer Acquisition. Finally, companies are paying you for your money. Just like in traditional finance, liquidity is the most valuable thing. So, as a way of incentivizing users to come, you are getting high interest rates.
Where Can We Earn Yields on Crypto and Stablecoins
The main way we can earn returns is through lending. You can lend your Bitcoin or Ethereum for example out for double digit interest. You may ask, how do I find such yields? The easiest way is by using an aggregator. Aggregators compare the market. They look all over the space and find you the best rates. Harvest.finance is a well known example of this. You can also use a platform such as Zapper.fi
One platform we love is NEXO which allows you to earn up to 8% interest on crypto 12% on stablecoins paid out daily. With over 1.5M+ users, $375M insurance on custodial assets, and an easy-to-use user experience, this is a great platform to explore if you’re looking to put your crypto to work.
Another of our favourite platforms for stablecoin returns is Rari Capital. With all of these platforms though, please know they come with risk and you need to do your own research. But they are a great way to get started without diving into individual platforms. Check out my YouTube Video, 5 Crypto Passive Income Strategies – How I Earn $5000+ A Month, if you’d like to learn more.
Stablecoins: More Than Just Earning Yields
We have established that stablecoins offer high yields and that compound interest is extremely profitable. Now consider the final element: stablecoin yields provide a profitable way of reducing your risk to crypto assets.
Understand that your split between crypto and stablecoins will determine your risk. Keeping a higher amount of crypto means your net worth is subject to high volatility. If the bear market comes, you will lose a lot, but if the bull market continues you will make a lot.
? Increasing your stablecoin holdings reduces your exposure to volatility and still ensures you are making serious returns ?
There’s two ways to go about increasing stablecoin holdings:
1️⃣ Set a clear target. If $200,000 of assets gives you freedom and changes your life, why wouldn’t you reduce volatility as you approach that level? That means, the closer you get to your target, the less crypto you hold and the more stablecoins you hold.
2️⃣ Reduce your crypto exposure every month. The bull market has an end date and every day we get closer to it. Instead of using a set target, we assume that every month the probability of the bull market ending increases. It makes sense to somewhat increase stablecoin exposure and reduce crypto exposure naturally over time.
Understanding the power of compound interest is an essential first step to building wealth. Once we understand this, we can look to opportunities to earn high yields, such as on our crypto and stablecoin assets. We can use stablecoin yields in particular to create a bull market edge by reducing our crypto exposure and simultaneously benefiting from the high interest rates. This allows us to build wealth whilst reducing exposure to violent and potentially overheated market conditions.
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