This bear market has been pretty rough at times. If you're still here, you're a real one.
Today, the Bankless analyst team shares our favorite trading strategies that we've employed to make the most of bear market opportunities. The first two strategies are free, you'll have to become a premium subscriber to Bankless to view the rest!
It’s a bore market. Prices have chopped around for the past three months, and liquidity has slowly drained from the crypto economy. Aside from the occasional, short-lived memecoin mania, the markets are pretty dull right now.
However, if you’re like me, you always have to scratch that degen itch. The portfolio must be put to work.
Trading these crabby conditions is treacherous. The global and permissionless nature of DeFi lets traders put their assets to work in a variety of different ways, but it’s very easy to chop yourself up overtrading in a minuscule range.
You can copy “trading strategies” from shady influencers on Twitter… but nothing beats knowing how to make the trade yourself. Below, we’ll go over some of the top trading strategies and ways in which you can earn some yield to help grow your stack.
We’ll give the first two for free – but for all the alpha, you’ll have to be a Bankless premium subscriber. What are you waiting for?
Leveraged staking is a strategy that can be employed to earn a higher staking yield (while taking on a commensurate amount of risk).
This strategy involves recursively levering up on a liquid staking derivative (LSD) by borrowing “raw” ETH against it in a money market in order to capture the spread between the leveraged staking yield and the borrowing cost.
Or in layman's terms: Borrowing ETH, swapping it back to the LSD, and then re-depositing the LSD to borrow more ETH.
This dual protocol requirement means that for now, the strategy is primarily limited to Lido's stETH and Rocket Pool's rETH.
While this can be done manually, there are many automated vaults, such as those offered by InstaDapp and Brahma, as well as tradable tokens like Index Coop’s icETH that automate the strategies, execution and risk management.
🧰 Strategy Execution:
Under the hood, leveraged staking works as follows:
Buy an LSD or stake ETH with one
Deposit your LSD into a supported money market
Borrow ETH against your LSD (Be mindful of your health factor!)
Swap the borrowed ETH for more of the LSD
Repeat Steps 2-4
Capture the spread between the ETH stake rate and the ETH borrow cost
⚠️ Risks:
Leveraged staking strategies come with many risks including:
Liquidation risk from the price of the LSD falling relative to ETH
Money market bad debt risk
Interest rate and staking yield risk which can erode the spread
Individual LSD risk
Smart contract risk for the LSD, money market, and automated strategy provider
A basis trade is a strategy that seeks to capture yield from perpetual futures contracts. Perpetuals are future contracts that continuously roll over and are the most widely traded derivative in crypto.
To tether the price of a perps contract to the spot price of the underlying asset it is tracking, traders will make continuous interest payments at a rate known as the funding rate.
With a basis trade, one is looking to earn the yield from funding while hedging out their price exposure to the underlying asset.
To do so, a trader must construct what’s known as a delta-neutral position, which refers to a flat position with no price exposure in either direction.
Basis trades are most easily executed when funding rates are positive, meaning that long positions are paying the shorts who are taking the other side of the trade.
They can be executed on decentralized exchanges such as dYdX as well as centralized exchanges like Binance. For a list of the hottest perpetual trading platforms, see The Perks of Decentralized Perps on the Bankless newsletter.
🧰 Strategy Execution:
To execute the strategy, you’ll have to do the following (we’ll assume that funding is positive):
(For this, and following strategies we’ll be using ETH as the asset in our examples. This strategy can apply to assets other than ETH.)
Take a long ETH spot position
Open a short ETH perps position in equal size to hedge out price exposure
Earn funding payments
⚠️ Risks:
Basis trades come with a variety of different risk factors including:
Liquidation risk on the short perpetuals position
Interest rate risk from an increase in funding rates
Smart contract and oracle risk on decentralized perpetuals exchanges
You can now stake your ETH through MetaMask with liquid staking providers, Lido and Rocket Pool. Head over to MetaMask Portfolio to get started! You can also view your assets in one place and discover other features such as Buy, Swap, and Bridge.
Not financial or tax advice. Bankless content is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time we may add links in this newsletter to products we use. We may receive commission if you make a purchase through one of these links. Additionally, the Bankless team hold crypto assets. See our investment disclosures here. | Terms & Conditions – Privacy Policy
