October 1, 2020

Bitcoin Strategy: How stablecoin savings can be used to offset potential BTC losses

4 min read

This article is written for the traditional buy and hold crypto investor (or “hodler” in cryto speech) and therefore not suitable for traders, who aim to profit through consistent buying and selling.

The objective of this article is to show you that it is possible to participate in the potential upside of Bitcoin whilst mitigating your downside through the use of high-yield stablecoin savings rates.

Disclaimer: All of the content written on CoinMarketExpert is unbiased and based on objective analysis. The information provided on this page should not be construed as an endorsement of cryptocurrency, a service provider or offering and should neither be considered a solicitation to buy or trade cryptocurrency. Cryptocurrencies carry substantial risk and are not suitable for everyone. No representation or warranty is given as to the accuracy or completeness of this information and consequently, any person acting on it does so entirely at their own risk. See further disclaimer at the bottom of the page.

Bitcoin’s price performance so far is on par or better than the second halving

As at the time of writing today, on 9th September 2020, BTCUSDT was trading at approximately $10,300. That represents a 19%-20% price increase from the close seen on 11th May 2020 (the halving date) and helps to dispel some of the comments we have seen in the media suggesting this is one of the worst post-halving periods for Bitcoin.

The halving that occurred on 11th May was the third of its kind. On that day, Bitcoin’s block reward fell from 12.5 BTC to 6.25 BTC, which means that over the next four years, the supply of freshly minted Bitcoins entering into circulation on a daily basis will be halved from roughly 1,800 to 900 BTC per day. Basic economics prescribes that a lower supply, coupled with a constant or rising level of demand leads to upward price pressures.

Until now, the price performance of Bitcoin has actually been pretty much on par or even better than the second post-havling period, depending on the data that you use. But let’s get the facts straight, it is definitely not worse.

Nonetheless, nobody can tell you precisely where Bitcoin is going to be heading in future with a high degree of certainty. The price volatility, as you may already be aware, is fierce and certainly not for the faint-hearted either.

Think like a proper investor or hedge fund manager

So, with the above said, why not consider thinking more like a hedge fund manager? Why not consider options that mitigate and/or hedge some (or most) of the risk whilst also giving you exposure to any potential upside gains that Bitcoin may have in store?

To answer this question we may need to look at financial derivatives such as options contracts, which is not everyone’s cup of tea since they are quite complex. As an alternative, we could also make use of the high level of “crypto interest” that can be earned by parking funds into stablecoin savings accounts.

Let’s take an example with Celsius Network, where the APR (‘Annual Percentage Rate’) on BTC savings is currently 4.51% (or 6.20% if you use CEL tokens) and the savings rate on stablcoins is 11.55% (or 15.89% if you opt to earn in CEL tokens).

In the example provided below, we allocated an exposure of $1,000 to BTC and a $2,000 exposure to stablecoins, so in total, our outlay is $3,000. Most stablecoins are meant to be pegged to fiat currencies and therefore their price is meant to be consistent with hardly any volatility.

Furthermore, we are assuming a “bad case” scenario in which the price of Bitcoin remains stable at around $10,000 during the first year and then halves to $5,000 in the second year before plummeting even further to $2,000 in year three. Of course, many of you may think this is an exaggeration but anything is possible with Bitcoin.

In our “bad case”, you can see that the high APR of 11.55% ( or the rate of crypto interest) that is earned by holding stablecoins helps to mitigate most of the losses incurred in Bitcoin. By year two the net position is slightly above our starting amount whilst on the third year it is slightly below.

Of course the above is a simplified example. However, we hope it gets you thinking about different ways other crypto products can be used to shield your downside exposure in any cryptocurrency asset whilst at the same time also participating in any potential upside. The same reasoning can be applied to a portfolio of cryptocurrency assets.

In the scenario simulated above, if Bitcoin rises to $20,000 in year two and three, the initial outlay of $3,000 rises to around $4,600, representing an attractive 53% return whilst in the “bad case” scenario the initial investment is still intact.

Of course, this strategy isn’t entirely risk free. We also note that the APR that is earned on stablecoin savings accounts may be adjusted lower over time so these are factors that you must also consider if you decide to apply this strategy.

If you are interested in high-yield accounts then check out the stablecoin savings accounts that our team at CoinMarketExpert has compiled using the latest data from trusted platforms.