My goal is to leave a strong financial position for my kids, and grand kids. So, my time horizon is medium to long term, and I am not looking to get rich overnight. I want to keep my risk at a manageable level. My main strategy is to have a diversified portfolio of a small group of high market cap volatile coins, and hedge my market/price risk with stablecoins that I invest, or maybe spend in the future. Most of the interest or dividends (staking rewards) that I earn is re-invested (rinse and repeat).
Maker Dao/Defi -The process for minting a stabelcoin called Dai, and keeping the PEG to USD was pioneered by the MakerDao project, and enabled Defi on Ethereum for everything that came after, like money markets for lending. It is based on collateralizing Eth to generate a stablecoin called Dai. So you can borrow Dai , and lend a volatile coin, which in this case is Eth. The next version will also support other coins for staking. The stability fee is equivalent to a "borrowing rate", but has been pretty high lately. (About 10-15% average fee, with 170% collateral ratio for eth, which has to be maintained, to avoid liquidation). The rates may change with Makerdao V 2.0 in Mid November, but we will have to see if this will be a profitable way to generate and invest Dai. Currently, there are now lots of other stablecoins, some with similar algorithms, some backed by fiat, or gold, and some based on an index, or mix of other assets to hedge the risk. They also have their own ways of lending, and vary in rates of return for investing. But most of the lending, borrowing, and margin trading stem from the Maker Dao model in some way. That is why it is important to understand for learning to use Defi (decentralised Finance).
Ways to acquire stable and volatile coins to invest
Getting started - Purchase with Fiat currency
I use direct connection to my bank account, or purchase coins with a credit card. Each method has advantages and disadvantages. I am in Canada, so I use the on-ramps that work here. The exact process will vary in every country, since the on/off ramps are regulated by different jurisdictions, each with their own rules (unlike crypto) - I buy small amounts, and use the "dollar cost average" method. I Don't try to time the market or buy the dip, since I am wrong as often as I am right, and this gives me an average cost, over time. I don't try to predict the future, especially in the short term. I only follow the technicals or fundamentals to help me guesstimate longer term trends.
I purchase mostly Eth, EOS and BNT and stake them to generate stablecoins as per below. I have a few other coins in my portfolio only because I need them for a specific purpose such as governance voting, network resources, or earning/repaying interest on loans (ex. Maker, NUT, Cel etc.), and not for speculation. If you can get paid in Crypto, then its even easier, since you have crossed the biggest barrier. For now, I am getting some small amounts, tips or airdrops for performing some tasks (like writing this article for example).
One alternative to Maker Dao involves Minting EOSDT on EOS Equilibrium, converting to Dai using Bancor, and then investing on Eth lending platforms, as per below. For this one, the stability fee is only 1%, and collateralisation ratio is 130%. Collateral is EOS, which also earns REX rewards while it is staked on this platform. But, you have to be careful about slippage when converting large amounts (greater than $500 at a time), and make sure the collateral stays above 130%, if the EOS price drops. If that happens I can either reduce my loan, or increase my collateral to avoid liquidation. I expect the borrowing fee to go up over time, as the service becomes more mature, and more people are using it, and when there are money markets on EOS. But for now, it is a good rate of return.
If you want to use this service, you will need a knowledge of EOSIO, Scatter, and Bancor. But you can also use other EOS wallets now, and it is getting easier. Equilibrium has a lot of good strategic partners, and I expect the ability to lend EOSDT natively on the EOS platform to be available soon. This will be a big deal. For now, you have to convert the EOSDT stablecoins to Dai, and lend them on Ethereum, which is the biggest roadblock to Defi on EOS right now, as far as I am concerned. Other EOS lending services like REX, and Chintai do not fill this need currently.
Another alternative is Minting USDB on peg.network, and converting to Dai with Bancor. Stability fee is 0%, and collateral ratio is about 120%. Collateral is BNT. But, this method is currently considered risky, since it is brand new, and unproven, and we don't know if the smart contracts are free of bugs. But it is a very good way to learn about how Maker style collateral and loans work, and the whole process around it, including liquidation. I can always get my funds out by paying back the USDB, and removing my BNT collateral. I am hoping that USDB will be supported by more trading and lending platforms, and becomes more liquid, as more people use and support it. For now, its a good return, if you are willing to tolerate the risk.
Centralised lending/borrowing (Primary difference is the fact that these platforms are regulated and require KYC. But they are easy to use and hide the back-end complexity from the user. They offer customer and technical support and you don't have to buy your own insurance, or worry about losing your private keys etc.)
I use Celsius/Bitgo service to HODL (custody) my Bitcoin and some stablecoins. The rates are pretty good, and better if you elect to get paid in the Cel tokens. I can also lend excess Eth and EOS at reasonable rates on Celsius. I can also borrow stablecoins at good rates on Celsius with volatile collateral of my choice. This enables me to avoid triggering a capital gains tax event by keeping my volatile coins, and not selling. There are other centralised lending platforms like Nexo, Blockfi, Cred etc, but I prefer Celsius for various reasons. I will be writing another article explaining why. I can accumulate the Cel tokens or cash them in on Switcheo, decentralised exchange for Eth, EOS, or BNT.
If/when the institutions (big companies, pension plans etc) get into this space, I expect them to use centralised services like this one. I don't see the portfolio managers messing with private keys, metamask, eth block explorers, insurance contracts etc. Same with the newcomers, who don't know or care about decentralisation, and just want the easiest way, to get the highest returns. To them, trust in people and companies is still important. It will take a long time for the mainstream culture to change to trusting autonomous smart contracts.
Decentralised lending/borrowing is for more advanced technical users, requires a knowledge of Ethereum and Metamask, and is more DYI oriented. They are private, and no KYC is required for now.
The first step is to learn how they work, do some due diligence by evaluating risk and security, and check stats and analytics to determine ROI. Testing and technical support is available on Twitter, Telegram, or the Docs for more detailed information.
I Lend Dai on Defi platforms like Compound, Fulcrum, Dydx, Nuo. Funds are pooled in audited, opensource smart contracts, and can be withdrawn at any time. These platforms are permissionless, trustless, and generally more decentralised. In some cases, it also makes sense to get some insurance with Nexus mutual, or similar service to further reduce contract risk. But, Insurance can get complicated, since some types of events may be covered, and others may not. (ex. smart contract hacks, but not a black swam market price drop)
I lend out my stablecoins, mostly Dai, for interest. I prefer decentralised stablecoins, and Dai seems to have the best return on these platforms, as well. The rates vary on all of these services, and keep changing. For now, I manually adjust them periodically, but there are a few auto re-balancers and aggregators coming that will move funds from one platform to another in an automated way, with lower fees by pooling and batching the transactions (ex. Idle.Finance). But I am waiting for these projects to mature a little more, since it adds another layer of smart contract risk to worry about.
Liquidity pools and relays
I can also provide liquidity for a share of the conversion fees at Uniswap and/or Bancor. I also have to provide Eth, or BNT (in the case of Bancor) with the stablecoin. Dai on Uniswap tends to be the most profitable for now, but the rates will vary. They can be monitored on Mydefi.org or some of the other analytical tools like ZumZoom, or Pools.fyi for calculating rates of return, net of "impermanent losses". Sometimes they are higher, and sometimes lower than lending rates. They are different than lending because the volatile coin is also staked, with the stablecoin. I avoid staking 2 volatile coins together since that is higher risk.
Staking (for dividends or inflation protection)
I am currently staking Cosmos and Tezos, as a hedge for the future. For now, most of the defi action is on Ethereum, but there is also some activity on other chains like EOS, and others. I believe that interopability between blockchains will be important for the future of Defi. Many people think of staking rewards as the equivalent of Dividends, in the traditional financial system. This is the only part of my strategy that requires a lock-in period, but I consider it a long term investment, and the amounts aren't large. They are automatically re-invested.
If we ever get to the point where we are using crypto as money, it will be the stablecoins that I will be spending, since they are easiest to convert to fiat, and have the same unit of account, for prices. I have been avoiding speculative trading, especially for short term gain, since I consider that high risk, and I don't want to try to time the market. If I buy a digital asset, its for a reason, other than speculation (except for Bitcoin). My portfolio is diversified, and risk is mitigated with interest and dividends on volatile coins (Celsius), and interest on stablecoins (Defi). I can change the mix during bear and bull markets, since almost none of the funds are locked-in. So, during a bear market I can increase the % devoted to stablecoins, and during a bull market, I can easily convert some stablecoins to more volatile coins.
This strategy is working for me, and I thought that I would share it, since it is better for liquidity and price action if more people adopt a similar strategy. I don't see it as a zero sum game, and we can all benefit from migrating away from the traditional financial system, which has a lot of issues that I won't go into here. A lot of the information that I got for this article was obtained from Defi Nation, which is a very helpful Facebook group. Let me know what you think, and how your strategy may be different depending on your circumstances and preferences.