How DeFi instruments help in trading crypto in bull and bear markets? When it comes to the world of finance, evolution is the key and perhaps the answer to everything, just as it is in the case with everything that exists in this world.
There have been a lot of changes happening in the world of finance since time immemorial but after the financial crisis of 2008, a lot of questions have come up regarding the practices as well as the amendments made in the finance system by the governments and the central banks.
The role of the entrenched players in the finance sector also faced a lot of criticisms.
In such a situation, Bitcoin came into existence in 2009 and it established an entirely new, if not better, kind of financial system.
It has all the tools and potential for it and the most significant aspect of it is that it is based on an entirely decentralized consensus much unlike the centralized fiat currency.
Decentralized Finance, or DeFi for short, is a specific system that is based on this particular theory where the customers can directly access different financial products on a decentralized blockchain network.
There is no middleman necessary for it such as a bank or a brokerage.
The main objective of a DeFi is to replace the centralized institutions like the banks and democratize finance.
It helps in establishing a direct relationship between the peers.
Every financial service offered today whether it is loans, savings, insurance or any other can one day exist on a blockchain network and not in a bank!
This will increase the efficiency of P2P transactions substantially and even help in trading crypto in bear and bull markets.
How? Well, to know, read on.
How DeFi Instruments Help in Trading Crypto in Bear and Bull Market?
In order to know exactly how the DeFi platforms and instruments will facilitate crypto trading in bear and bull market conditions, you will first need to understand what it is actually, the instruments, the risks, and other related basic aspects.
These DeFi platforms are specifically designed and built to be independent and operate distinctively from their backers and creators.
Over time, these platforms will be governed ultimately by the community of users.
These users will however get the power to control these platforms from their holdings of the specific token of the specific protocol.
In order to improve their investing and trading endeavors apart from keeping all these risk factors in their minds, they should also consider using the DeFi instruments and platforms.
This will allow them to use crypto in a far better way and in a much more sophisticated manner while trading with and investing in them.
The world of DeFi is evolving continuously and is growing steadily with the diverse types and range of asset classes, derivatives, and tools.
With such developments, it will offer the crypto traders and investors much more opportunities to make profits.
With DeFi, they will be able to do much more than simply buying the dip and holding the coins for a long period of time, expecting that there will be a significant appreciation in the prices.
With the use of DeFi platforms and instruments, all crypto investors and traders will now be able to invest and trade in specific asset tokens that emulate non-crypto markets.
They will have a better insight and knowledge of how to trade and invest efficiently in a bull or a bear market.
These asset tokens will allow the traders and investors to perform a diverse range of activities that will increase the chances of making more profits such as:
- Taking long or short views on the crypto market
- Buying call or put options
- Taking views on volatility and
- Chasing yield either through lending or derivative product offerings that are progressively more complex.
The level of support provided by these DeFi platforms and instruments will however depend on the degree of creativity and sophistication of it.
However, the DeFi platforms are built upon ideas and innovations on top of existing products that help in creating money legos.
Therefore, the DeFi platforms and instruments are quite exciting and it is good to see that it is expanding and maturing every day.
So, if you are frustrated at the trading strategies that are currently available in the crypto market due to their apparent simplicity, you should use DeFi instruments and platforms.
But before that you should take a dive deeper into it in order to discover how exactly it can add innovative dimensions to your crypto trading and investment strategies.
With the DeFi platforms and instruments introduced, once again, a huge amount of money was invested in this field of blockchain technology and more and more applications were developed and running.
This, a few crypto experts think, is the sign of a new bubble, but there are a few other optimistic people within the blockchain community who believe that it will bring a new dawn in blockchain technology with a few new development cycles.
Many more such cycles will follow in the near future, which, needless to say, will make Decentralized Finance much more efficient, realistic, secure, and more convenient to use than traditional finance.
This may result in the deterioration in profits for the traditional finance and appreciation of the same in the case of Decentralized Finance.
Now, all that may sound very promising and alluring but, just as it is with everything, there are also a few risks of DeFi that you should also be well aware of before jumping into any conclusions.
Just like Bitcoin and other crypto coins, Decentralized Finance is also in its nascent stage.
In fact, according to a report of DeFi Pulse, the total value locked in DeFi contracts as of now is just over $100 billion.
It is the risks inherent in this recent innovation that hold DeFi back a bit. Some of the common risks of DeFi are:
- Scams and hacks – The DeFi platform is still puzzled with scams and hacks that are so common in this space such as rug pulls, which indicates draining funds from a protocol by the hackers. The main reason behind the DeFi platform to be so prone to hacks is that many of these platforms operate on open-source smart contracts. These smart contracts give the hackers the entry points to get into a network easily and probe its weaknesses.
- Lack of backup – DeFi too needs to be secured using private keys just like the crypto wallets. The problem with it is that there are often no proper backups of these long, unique codes. If it is lost, just like crypto, there will be no way to recover those funds, ever.
Well, now that you have the basic knowledge about DeFI, it is time to take a look at the different DeFi tools.
As of now, there aren’t many DeFi tools available but a couple of these tools surely need specific mention as under.
The smart contracts are special programs that run on blockchain networks and are executed automatically when the set market conditions are met.
These smart contracts help in doing much more than merely receiving and sending crypto due to their more functional features and sophistication such as setting up a loan agreement.
When the conditions are not met, the collateral may be liquidated and when it is met, it will be executed automatically without needing a bank or a middleman simply by using a computer code.
More commonly referred to as dApps, the Decentralized Applications are built primarily by using the smart contracts.
These Decentralized Applications are pretty much like any other regular app and offer almost similar types of functions.
However, the main difference in the dApps is that these operate typically on a P2P network such as a blockchain network.
This means that the network is not controlled by any single entity but by all the participants on it.
Understanding the Maturity Stages
Over the years crypto-based finance or Decentralized Finance has arrived at the next stages of maturity and it covers all of those basic functions of a financial system.
In fact, DeFi has developed and matured so much that several critics argue that it has reached a vital transitional step to turn out to be a suitable replacement for the traditional finance solutions.
In the past, the Decentralized Finance system was efficient in only realizing value transfers but now, with further development, the time value of money is also reflected in DeFi.
Ideally, the Decentralized Finance system has gone through 3 basic stages of maturity which are discussed below.
The first stage involves efficient value transfers.
When it comes to blockchain business models, till date, it is the wallet providers and the centralized exchanges that have been the only successful ones when their scale is considered.
The main reason behind the success of the centralized exchanges is that these are the key entry points to the crypto world.
For any common crypto user, it is needed to swap US dollar or fiat money into crypto before interacting with the services offered by the Decentralized Finance platforms.
Moreover, it is also needed to store these crypto coins safely and transfer them through the wallet applications.
Therefore, it is only with the two basic applications namely a crypto exchange and a wallet that a crypto user can conduct value transfer efficiently between anonymous parties for the first time.
And, for that they do not need any traditional finance actor in between.
It is this feature that has enabled the crypto space to carry out limited functions that are typical of a financial system such as speculation on prices of crypto coins and assistance and expedition of payments.
Therefore, this gave rise to the disintermediation of the financial firms which further resulted in a seamless payment system.
The second stage involves connecting the borrowers and savers.
Even after going through the first stage of maturity, the DeFi platforms still missed the ability to handle efficiently the fund flows from the borrowers to the savers and vice versa.
Therefore, the system needed to go through another stage of development to gain more maturity.
For that, additional elements were developed and added in the following years.
Some of these developmental elements include decentralized exchanges and more effective borrowing and lending protocols.
Only a proper platform will be able to facilitate the flow of funds between borrowers and savers and vice versa.
The most significant aspect of this development stage is the creation of the lending and borrowing protocol Compound, which resulted in an explosive growth in the entire DeFi ecosystem.
It was all due to the governance token, COMP.
The third stage involves competing for the traditional finance firms.
The DeFi platforms typically have to compete with the traditional financial firms to get the same resources.
However, for that, the DeFi platforms do not need to follow the same rules as the traditional finance system because it is an encapsulated system.
In fact, regulatory policies can be hardly enforced into the DeFi space and the national laws are not applicable as well.
On the other hand, the traditional finance space is highly regulated which is why the DeFi space has a significant edge over it.
This means that, in the DeFi space, any type of financial improvements can be developed and put into practice freely without needing to worry about the regulations and their peripheries.
However, looking from the other perspective, there are a few specific disadvantages of not having common political or legislative principles.
For example, the mainstream savers may not have the trust on the current DeFi space and may not invest in it.
This calls for another stage of development in it based on two specific questions such as:
- To what level the savers in the traditional finance system are willing to move their funds from there to the DeFi platforms and
- To what level the borrowers in the traditional finance system are willing to access those funds available on the DeFi platforms.
The answer to both these questions would be, to a very low level, especially if the trust on the DeFi platforms is low.
However, after going through the third stage of development, there has been a huge influx of funds into the DeFi space since June 2020.
The main reason behind it is thought to be the trust it could build among the users who felt it is safe to move their idle assets in the crypto wallets resulting from the redistribution of assets in the crypto space to the DeFi space.
Today, there has been a significant rise in the use of the DeFi protocols which indicates that the system is working properly.
It also proves that the system is quite scalable.
However, as of now, the primary users of DeFi are the early adopters and the innovators and a very small portion of households.
But, down the lane it may become mainstream with its much improved potential.
The potential of the DeFi is immense and it can surely outdo the traditional finance systems in the next few years to follow.
Typically, there are three basic reasons for this platform to do much better than the traditional finance systems, and those are the main reasons that it is gaining so much traction to become a hot topic for economic, scientific, and public debates.
Rate of growth:
The DeFi ecosystem is considered to be a global system that has a very high scalability quotient.
It can grow exponentially and quickly once it can prove its usability as a whole platform or even as a particular DeFi application.
This growth is typically monitored by the DeFi Pulse website and is typically based on the TVL or the Total Value Locked on smart contracts considering all related DeFi applications.
This is actually the amount of money that is invested in the entire DeFi ecosystem by the users. Any increase in this TVL amount indicates its growth potential.
Scope for growth:
There are several crypto market analytics firms that conduct surveys on the total market capitalization of all of the DeFi applications.
Two years back, it was just 1.5%, according to Messari.
This figure shows that there is a lot of scope for growth of the DeFi platforms and apps.
This can be accomplished by further redistribution of assets in the crypto space.
However, if you look over and above the crypto space, you may be able to deduce the actual prospects of DeFi.
You may know that the household debt alone is worth tens of trillions of dollars all over the world.
If DeFi can cover even a miniscule percent of it, say 0.1%, the TVL of DeFi would grow by more than 500%.
New market sectors:
According to an old report of The World Bank, there are about 1.7 billion adults all over the world who do not have access to any proper banking system or service.
This figure is growing with each passing day. Since DeFi is permissionless by nature, anyone can access its services and products from any corner of the world.
All that is required to access DeFi services is a smartphone, electricity, and a stable and reliable internet connection.
This means that DeFi can touch new market segments and provide a feasible option in areas where banking services are not available or are very expensive in comparison to income.
It can also work in those areas where financial institutions are too far away and that too with very little trust.
However, experts and critics believe that DeFi can increase its probability for success even further if only the apps come with more insightful user interfaces that are easy to use by any common person.
Also, they suggest that it is also required to make the on- and off-ramp with fiat currencies much simpler.
Now finally, it is time to look at the main aspect of the article, how the DeFi instruments will help in trading crypto assets in bull and bear markets.
Typically, the Decentralized Finance world opened new avenues and has offered a diverse set of opportunities to invest in the crypto world with its fast expansion and high sophistication levels.
In fact, it is DeFi that has changed the traditional, and somewhat frustrating ‘buy sell, hold’ concept in crypto investment.
And, with the gradual convergence of DeFi with the traditional finance systems, this has become a reliable platform to consider in the current scenario.
Here are some of the best ways to invest in crypto and make profits irrespective of the market conditions – bull or bear.
Going long or short:
You can go long or short crypto and also go for buying options and using leverage when you trade crypto to reap the maximum benefits from the given market conditions.
As you may know, there is one of the most significant limitations that most of the crypto investors and traders face while making their investments through any common crypto trading platform.
It is that it is limited to purely the ‘buy low, sell high’ types of trading or investing most of the time.
Considering the characteristic and most famous feature of crypto which is its high level of volatility in prices, there can be a lot of opportunities to make a lot of profit when you follow a ‘long only’ crypto investment or trading strategy.
However, there is a downside with this type of trading strategy.
Since you have made a long term investment you may miss out on the profits that you could have made due to the negative price movements of the crypto coin as well as the rise or fall in the volatility levels.
This is where you should consider the call/put options or shorting and implementing leverage.
This will add all the missing pieces and enhance your chances to make more profits irrespective of the market conditions.
You will get a lot of help in this aspect from the DeFi platform and the growing set of tools that it has on offer.
As an investor, these tools will allow you to make the best use of the price movements of the crypto assets in any direction in the best possible way.
These DeFi tools will also help you to utilize the value of volatility in a much more sophisticated way.
As a market participant you will not have to think in the traditional way anymore where you buy the dip when the prices go down.
When investors buy a long or short version of a major crypto coins and tokens, they stand to gain more due to their short or long exposures.
When you buy a long position, say for Bitcoin, you will actually not have to buy the coins on an exchange.
Similarly, when you short Bitcoin, the value of your coin increases even if the price declines due to its short exposure.
This means that when you take positive or negative views on the major coins and tokens, you will know more about the market and capitalize on the prevailing situation accordingly.
You may also purchase call or put options on major crypto coins which will enhance your profit making chances even further with leverage.
Depending on the type of platform you choose, just like all other crypto traders and investors, you can connect your crypto wallets and buy coins with several times leverage.
You will also be able to short your coins, say Ether, by borrowing a specific amount of these coins purchased in DAI for a fixed period of time.
You can convert those coins back into DAI and repurchase Ether later on, maybe at a much lower price, in DAI and repay the amount you borrowed.
If the price of the coins decreases during this time, you stand a chance to make profits equal to the amount of difference in the DAI price between the times when you sold the borrowed Ether and when you repaid it later on.
Borrowing and lending:
You can also borrow or lend with interest on specific platforms connecting your crypto wallet.
There is a wide range of crypto coins including stablecoins that you can lend or borrow at a preset agreed rate.
You will however need to put up collateral for such loans but that is typically mentioned in the form of a chosen subset of coins or tokens upfront. There are two specific ways in which you can earn.
One, you can earn a rate of return when you lend the coins or tokens on these platforms.
Two, you can earn a return on gains or losses of the coin value by having a loan on margin and then going long or short the coin or token.
If you have a short view, you may convert the coins into DAI, for example, and then repurchase the coin or token you borrowed to repay the loan with fewer DAI than the number you sold it for originally.
If you are a value added lender, then, depending on the particular platform you choose, you can also make the best use of the new development such as Yield that openly offers anywhere between 12% and 20% of return on loans.
Also, there are a few specific platforms that may repay the loans over time for you, provided you borrow it with them.
You can also earn a lot more if you diversify your investment. You can choose currencies, synthetic stocks, and commodities for that matter to invest in.
Once again, depending on the particular platform you choose, you can have the opportunity to produce and trade tokens that can track the prices synthetically of the publicly traded stocks, currencies and commodities along with several coins and tokens of the crypto space.
The value of these tokens is planned and designed to follow the public pricing data for the attached asset underlying it.
When the token is created, you will find it on quite a few exchanges and market price data websites.
Apart from that, there are also a lot of new decentralized asset management platforms coming up that will permit you to invest in a bunch of tokens called baskets as a strategy.
You may also be allowed to buy the strategies of the successful traders and make the best use of their proven decision making skills.
At this juncture, there are a few key points that you need to keep in mind while making such investments.
One, when you invest in tokens based on their stock prices you should not expect to receive any dividends from them because that is a benefit that is exclusively offered in the case of actual stockholders of equity in the record.
Two, if you are investing in any mirror asset tokens, irrespective of these tokens being mirror stocks, currencies, commodities, or any other assets, remember that the prices of these tokens may not track the price movements or levels of the underlying asset.
Ideally, the main reason behind this is that these tokens come with two basic elements such as:
- The price of the underlying asset that these tokens are programmed to imitate and
- The actual supply and demand for that particular token that it imitates in the crypto space.
However, if you want to buy or sell any particular mirror asset token that comes with a limited supply and also has a limited demand in the crypto space, it is highly likely that you will find major price inefficiencies in those tokens.
This is because these tokens can sometimes twist their pricing quite radically.
Finally, this is one of the most interesting and significant developments in DeFi according to many users.
There are typically ‘costless’ lotteries. You can buy lottery tickets of daily or weekly drawings and if you do not win, each time you will be given back the cost of the ticket in full. You may also roll that amount to buy your next lottery ticket.
This means that you will not have to pay any additional capital if you continue playing without winning.
The only cost you pay for participation is the opportunity cost of your time.
Now, this also means one more thing as it is pointed out by some theorists.
It is that the potential to earn a much higher rate of return by the participating players is much higher as compared to any standard crypto lending rate, at least in theory.
This is all due to the costless nature of these lotteries.
However, you should be aware of the risks inherent to these ‘lottery over lending’ strategies.
One of the most significant risks is that you may not win even a single lottery over time.
On the other hand, traditional lending approaches will at least provide you with a more foreseeable rate of return, no matter how low it is.
As it is said, ‘something is better than nothing.’
Therefore, all of the ways mentioned above are good but come with their characteristic pros and cons.
It is therefore required to do the due diligence and a lot of research to choose the right one according to the need and suitability.
The world of finance is changing every day for the better. With the introduction of the DeFi instruments and platforms trading has become better across different asset classes including crypto in bear and bull markets. Now you know how and why.