Over recent weeks, the cryptocurrency market has suffered as a result of the current financial and economic backdrop. In such an environment, a strong passive income strategy could have helped digital asset holders mitigate losses. With attractive interest rates available for holders of BTC and other cryptocurrencies, this passive income can greatly reduce the hit from a sell-off, while those willing to hold until prices correct themselves will see an additional boost to returns.
When investors first began committing money to cryptocurrencies, their aim was simple: buy cryptocurrency, wait until it goes up in value, and sell when you think it has reached a peak. And for BTC investors, this would have generally been a winning strategy over the years.
The lucky few early adopters that bought one Bitcoin at the crypto’s all-time low of $67.81 on Jul 6, 2013, for example, would have turned that measly investment into $38,275 by 8 March 2022. Even those that invested two years ago would still be reaping substantial rewards, having made some 330% on their investment since 8 March 2020.
In the midst of a bear market
However, for those that might have decided to dip their toes into the world of crypto more recently, an investment in BTC will have proved less lucrative as the cryptocurrency is currently in the midst of a bear market. Those that invested three months ago would have suffered losses of 24% as of 8 March 2022, while since its peak at $69,044.77 the cryptocurrency is down 44.6%.
Crypto investing, perhaps more than any other investment, is governed by market sentiment. Currently, the sentiment towards cryptocurrencies is firmly skewed in the direction of extreme fear, according to the Crypto Fear & Greed Index, as investors across global markets have been spooked by the current geopolitical situation.
Source: https://alternative.me/crypto/fear-and-greed-index/ 8 March 2022
Digital wealth platforms comes to the rescue
At a time of such substantial losses, it is more important than ever for investors to do what they can to protect their portfolios. A growing field in cryptocurrency investing, digital wealth platforms allow investors to earn annual interest for staking their digital assets, which can help mitigate losses from a market downturn such as we are experiencing today.
A great example of this is the Yield App Bitcoin Fund, which allows customers to earn a market-leading rate of up to 8% p.a. on their BTC. This strategy allows customers to boost gains during the good times, and most importantly mitigate losses when times are tough.
Over one year, for example, an annual rate of 8% would leave a holder of a single Bitcoin with 1.08 Bitcoin. One year ago (on Monday, March 8, 2021) one Bitcoin was worth $51,313. This means that today, the savvy individual who put their Bitcoin into a passive income strategy would be sitting on $41,791 (1.08 Bitcoin), mitigating the loss over this time period.
An Bitcoin owner who didn’t use such a strategy and chose instead to simply hold Bitcoin would be looking at losses of $12,618 over the same time frame. This means that, simply by parking their Bitcoin in a passive income portfolio, this customer could have offset $3,086 of losses as Bitcoin’s price fell.
This is potentially a good strategy for long-term investors, or even those just waiting out the storm. During bear markets, passive income strategies can help mitigate losses and then capture additional upside when the market enters its next bullish phase.
Other strategies to mitigate BTC losses
There are a range of other strategies to mitigate losses during a market downturn and it could be prudent for a digital asset investor to combine approaches. For example, they could consider holding a portion of their assets in stablecoins – cryptocurrencies pegged to fiat currencies, such as USD Tether (USDT) and USD Coin (USDC) which are pegged to the US dollar. This can help further mitigate the volatility of other cryptocurrencies, such as Bitcoin.
The crypto market can often seem like a rollercoaster
For example, if a crypto investor decided to put half of their money into BTC and half into USDT and the value of BTC fell by 40% in US dollar terms, the overall portfolio value will have only declined by 20%. If the BTC portion of the portfolio was sitting in a fund paying an annual rate of 8%, then the BTC losses would have been mitigated further, depending on the amount invested and the time holding the digital asset.
Another strategy for an experienced digital asset investor (but ONLY an experienced digital asset investor) could be to engage in yield farming. Yield farming, or liquidity mining, is a process of moving money around the decentralized finance (DeFi) ecosystem in return for greater and greater yields. This may help provide a boost during times of market stress, however it is complicated, costly and risky, so beware.
For those looking to easily and passively protect their portfolios, though, a passive income strategy is a potentially interesting option. Especially for more volatile assets like Bitcoin, this could enhance an investors’ strategy during a market downturn, helping to mitigate losses in what can often be sharp and sudden sell-offs.
This strategy is not only relevant for BTC holders; it can be applied to many other cryptocurrencies. For example, the Yield App Ethereum portfolio offers up to 8% p.a., helping investors in ETH mitigate losses and boost gains while our stablecoin portfolios offer up to 14% p.a..