While it’s true that “cash is king,” it loses value every day it’s stored in a bank account or, in the case of cryptocurrency, a wallet, due to inflation. And this is especially true as recent inflation figures in the United States set a new record high not seen in forty years. Inflation still reduces the value of a target asset over time, but the dollar-cost-averaging (DCA) technique helps investors mitigate the consequences of volatility by spreading out their purchases of an unstable asset over time.
For instance, on Solana, where the protocol inflation rate is fixed at 8% per year, property values depreciate at that rate if income isn’t earned through farming or the use of decentralized finance (DeFi).
Even though the U.S. Dollar Index (DXY) has gone up by 17.3 percent in the last year (as of July 13, 2022), investors continue to buy risky assets in the hopes of making big money during the bull market.
Investors start to feel anxious, panicky, and depressed during crypto winter. Real value capture, on the other hand, has been shown to be possible even during bear markets in crypto over the course of several cycles. At the moment, a lot of people think that “buying and holding” combined with DCA could be a good way to invest during a crypto winter.
Investors typically avoid direct investment and instead save up for a time when the macroeconomic environment is more favorable. On the other hand, day traders are the only ones who can realistically attempt to time the market. On the other hand, because the market is so volatile, the average retail investor is more likely to lose money and take risks.
In the current crypto market, it is very risky to stake assets on-chain, lock them in liquidity pools, or mine on centralized exchanges. The fundamental question is whether it is wise to just buy and hodl in light of these unknowns.
Anchor Protocol and Celsius are two recent examples of yield platforms that have shown that if the tokenomics model or the platform’s investment decisions don’t provide a solid foundation for creating yields, then unrealistically high yields may be followed by a wave of liquidations. The safest way to fight inflation is probably by earning interest on digital assets that aren’t being used. This can be done through centralized or decentralized finance protocols that have strong risk management, liquid rewards, and don’t offer too much interest.
When it comes to digital assets, the returns offered by DeFi and centralized finance (CeFi) protocols might be rather different. When it comes to DeFi protocols, the possibility of lock-ups to get a marginal yield is a big deal because it makes it harder for investors to react to sudden changes in the market. Strategies may also involve other risks. For instance, the price discrepancy between the underlying asset and derivative contracts on stETH makes Lido liquid staking risky.
Yield offerings on digital assets are negligible, despite the fact that CeFi like Gemini and Coinbase have demonstrated responsible user fund management with transparency. Even though it’s best not to take too many risks with the user’s money and instead follow the rules set by the risk management framework, the returns aren’t that great.