How to mitigate Bitcoin losses during a bear market

The crypto market has seemingly entered a bear market in recent weeks, but a strong decentralized finance (DeFi) strategy could have helped crypto HODLers mitigate losses. With double-digit percentage APYs available for HODLers of BTC and other cryptocurrencies, this passive income can greatly reduce the hit from a sell-off, while investors willing to HODL 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 $33,736 on July 6, 2021. Even those that invested 12 months ago would still be reaping substantial rewards, having made some 270% on their investment since July 2020.


Total growth in Bitcoin's price since May 2013

Source: https://coingecko.com 

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 six months ago would have suffered losses of 14% to July 6, while those that invested three months ago have seen their holding decline by nearly 40%.

Crypto investing, perhaps more than any other investment, is governed by market sentiment, and the sentiment towards cryptocurrencies at the moment is firmly skewed in the direction of extreme fear, according to the Crypto Fear & Greed Index. 


How investors feel about the crypto market in early July 2021


Source: https://alternative.me/crypto/fear-and-greed-index/ July 6, 2021


Investors have been spooked by a regulatory crackdown on crypto miners by the Chinese government and by not-so-supportive rhetoric from eccentric billionaire Elon Musk, who recently u-turned on allowing customers to purchase Tesla vehicles with Bitcoin. Naturally, all this sent BTC tumbling and it is currently trading around 47% below its all-time high of $64,804, reached on April 14, 2021. 

DeFi 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, DeFi allows investors to earn an annual percentage yield (APY) on the cryptocurrencies they HODL in their wallets, 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, launched on Thursday, July 8, which allows users to earn a market-leading rate of up to 12% APY to HODL BTC. This strategy allows an investor to boost gains during the good times, and most importantly mitigate losses when times are tough. 

Over six months, for example, an APY of 12% would leave a HODLer of a single Bitcoin with 1.06 Bitcoin. Six months ago (on Friday, January 8) one Bitcoin was worth $39,547. This means that today, the savvy investor that put their Bitcoin into a DeFi passive income strategy would be sitting on $35,760 (1.06 Bitcoin), constituting a loss of $3,790. 

However, an investor who didn’t use a DeFi strategy and chose instead to simply HODL Bitcoin would be looking at losses of $5,811 over the same time frame. This means that, simply by parking their Bitcoin in a DeFi passive income fund, an investor could have offset $2,021 of losses as Bitcoin’s price fell.

This is potentially a good strategy for long-term HODLrs, or even those waiting out the storm as, as everyone knows, selling in a down market is not how to make money as an investor! During bear markets an investor could be using DeFi to mitigate losses and then capture additional upside when the market enters its next bullish phase. Either way, an investor in this type of Bitcoin fund comes out a winner over someone simply buying and HODLing BTC.

Other DeFi strategies to mitigate BTC losses

DeFi offers a range of other strategies to mitigate losses during a market downturn and it could be prudent for a crypto investor to combine approaches. For example, an investor could consider holding a portion of their assets in stablecoins – crypto assets pegged to “real life” 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

Source: masterthecrypto.com

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 APY of 12%, then the BTC losses would have been mitigated further, depending on the amount invested and the time HODLing the digital asset.

Another strategy for an experienced DeFi investor (but ONLY an experienced DeFi investor) could be to engage in yield farming. Yield farming, or liquidity mining, is a process of moving money around the 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 crypto investors looking to easily and passively protect their portfolios, though, a DeFi passive income fund 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 HODLers; it can be applied to many other cryptocurrencies. For example, the YIELD App Ethereum fund offers up to 17.5% APY, helping investors in ETH mitigate losses and boost gains while our stablecoin funds offer up to 20% APY.

Do you want to earn the market’s leading APY’s on your digital assets? Sign up for a YIELD App account today

Read More

Related Articles

No items found.