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How to build a stablecoin strategy to protect and grow your portfolio
Ask any seasoned investor about their most successful strategy and they will likely answer with three words: diversify, diversify, diversify. Since time immemorial, wise humans have known not to put all their eggs in one basket, lest that basket should fall off the wagon, and nowhere does this adage apply more aptly than the wild world of cryptocurrency.
While most stock markets could not be accused of being boring in recent years, the volatility seen in crypto puts the weekly single-digit percentage moves seen in stocks in the shade. As we have witnessed in recent weeks especially, in crypto, a daily move of 20% either up or down is not uncommon, often making for some adrenaline-pumping viewing.
Those that watch and trade these moves closely have complex strategies - and typically elevated heart rates - which can produce good, bad, but typically mixed results. Those that have full-time jobs, however, are not able to take advantage of split-second opportunities and instead need to ensure their portfolios can hold their own during volatile periods.
This is where stablecoins come in. For those unfamiliar with this groundbreaking asset class - pioneered by decentralized finance (DeFi) - stablecoins are cryptocurrencies whose prices are pegged to real-world, “fiat” currencies, predominantly the US dollar. There are different types of stablecoin, with some backed 1:1 by the fiat they are pegged to, while others are backed by a mixture of different cryptocurrencies, while others still use algorithms to hold their value close to their targets.
USD Tether (USDT), USD Coin (USDC) and True USD (TUSD) are examples of coins backed 1:1 by the US dollar, with USDC and TUSD undertaking and publishing regular audits to prove this. DAI is an example of a crypto-collateralized stablecoin with no fiat backing, and Algorand and Frax are examples of algorithmic stablecoins which use sophisticated multi-token ecosystems and liquidity pools to maintain a close peg to one dollar.
Perhaps unsurprisingly, the stablecoins backed by physical fiat are among the biggest, with investors often preferring the stronger link to “real-world” currencies that these bring to their portfolios. Different types of stablecoins serve different needs and interests, but if you are new to stablecoins and/or crypto in general, a physically backed stablecoin may be a good place to start.
Building a stable portfolio
A holding of stablecoins can be a good foundation on which to build or protect a crypto portfolio. This is because it will provide a buffer when the markets are volatile.
If, for example, you hold 50% Bitcoin and 50% stablecoins in your $10,000 portfolio, on the day that Bitcoin falls by 25% (as it can do!) then your total portfolio will only be down 12.5%, or $1,250, rather than $2,500 as it would be if you had been 100% in Bitcoin (providing the US dollar and/or your stablecoin of choice hasn’t crashed!). As such, stablecoins can provide a safety net that may help investors to sleep a little easier at night in wilder times.
How much of your portfolio you want to protect in this way will be up to how much risk you can personally tolerate. If ensuring that 50% of your portfolio will always be in-tact is important, then that may be how much you should hold in stablecoins.
Bear in mind, though, that when Bitcoin (or whichever more volatile cryptocurrency you hold) swings the other way, you will miss out on that extra growth. In the above example, if Bitcoin were to rise by 25%, then those holding 50% of a $10,000 portfolio in the asset would gain $1,250, rather than the $2,500 they would if they were all-in Bitcoin.
Protect and grow with income
Balancing risk versus reward is an essential part of any investment strategy: there is always a trade-off to be had here, so it’s important to think about how much of your portfolio you need to keep “liquid”, or ready to spend. To decide, you can think about what you need and what you want from your investments, and over what timeframe. As part of this, you could plan to reserve some of your stablecoins to buy riskier assets when markets fall, taking advantage of lower prices. There are a number of options to consider.
One great way to boost your portfolio while still protecting it is to make sure that your stablecoin holding is earning an income. Taking the above example again, if the 50% of a $10,000 portfolio that is sitting in stablecoins is earning an Annual Percentage Yield (APY) of 10%, then the total portfolio would grow by $1,750 if the Bitcoin half were to grow 25% over a year. Conversely, it would also only lose $750 if the Bitcoin half were to fall 25% over a year.
Boost growth with APY incentives
The more interest you earn on your stablecoins, the more you can boost your portfolio while protecting it. With YIELD App, for example, investors can earn up to 18% APY on USDT and USDC if they also hold YLD tokens in their wallets. The more YLD tokens they hold, the more APY they earn both in their invested stablecoin, but also in more YLD. This also allows users to participate in potential price growth of the YLD token, which can further boost their portfolios.
What is more, at YIELD App we don’t only pay interest on stablecoins, but also on Ether (ETH): the second-largest cryptocurrency by market capitalization, and soon on Bitcoin - the biggest. This provides even further protection for the more volatile portion of investors’ portfolios, ensuring they continue to earn income as they hold onto their investments during the kind of sharp market downturn we have seen recently.
This is a great all-around strategy for protecting a portfolio while maximizing growth. Holding a solid portion of stablecoins will provide a strong buffer against market volatility, ensuring the most essential part of your portfolio remains safe.
However, ensuring you are earning income on that portion is also important to boost returns while protecting your assets, while earning income on your more volatile holdings is even better. Combining these factors in a well-diversified portfolio is, typically, a recipe for long-term investment success.