There is an old saying that “cash is king”, but if it is in a bank account or, in the case of cryptocurrencies, in a wallet, it decreases every day due to inflation.. This is especially true now that inflation in the United States breaks its 40-year high. Although the dollar cost averaging (DCA) strategy allows an investor to minimize the effects of volatility by buying an unstable asset over time intervals, inflation still causes the value of the target asset to decline over time..
For example, Solana (SOL) has a default protocol inflation rate of 8%, and if the return is not generated through farming or the use of decentralized finance (DeFi), the holdings depreciate at a rate of 8 % annual.
Nevertheless, Despite the US Dollar Index (DXY) rising 17.3% in a year, as of July 13, 2022, hopes of receiving significant returns in the bull market continue to drive investors to commit to volatile assets.
In the upcoming report “Blockchain Adoption and Use Cases: Finding Solutions in Surprising Ways”, Cointelegraph Research will delve into different solutions that will help counter inflation in the current bear market.
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The crypto winter is a period when anxiety, panic, and depression begin to overwhelm investors. Nevertheless, many cryptocurrency cycles have shown that true value capture can be achieved during a bear market. For many, the current sentiment is that “buy and hold”, combined with dollar cost averaging (DCA), may be one of the best investment strategies during a crypto winter..
In most cases, investors refrain from investing directly and accumulate capital to buy assets when the macro condition improves.. However, timing the market is challenging and only feasible for active day traders. In contrast, the average retail investor takes higher risks and is more vulnerable to losses from rapid market changes..
Where to go?
Amid various calamities in the cryptocurrency space, staking on-chain nodes, blocking liquidity pools, or generating yield through centralized exchanges carry a host of risks.. Given these uncertainties, the big question remains whether it is better to buy and hold.
Anchor Protocol, Celsius and other yield platforms have recently shown that if the basis of yield generation is poorly supported by the model of the token economy or the investment decisions of the platform, the returns are “too good”. they can be replaced by a wave of liquidations. Generating returns on idle digital assets through centralized or decentralized funding protocols with strong risk management, liquid rewards, and not-too-aggressive yield offers is probably the least risky way to fight inflation.
Both DeFi and Centralized Funding (CeFi) protocols can offer different levels of return for identical digital assets. With DeFi protocols, the risk of locking in to generate a marginal return is another important factor, as it limits an investor’s ability to react quickly should the market change adversely. In addition, the strategies may carry additional risks.. For example, Lido liquid staking with StETH derivative contracts is vulnerable to price divergence of the underlying asset.
Although CeFi exchanges like Gemini and Coinbase, unlike many other such platforms, have shown prudent management of user funds with transparency, the performance offerings of digital assets are negligible. While staying within the framework of risk management and not taking aggressive risks with user funds is beneficial, the returns are relatively low.
While maintaining purchasing discipline within the ACA framework and doing your research is crucial, finding a low-risk solution that generates substantial returns can be tricky. For its part, a new cycle of the cryptocurrency market is about to bring developments that, hopefully, will provide innovative solutions, attractive both in terms of risk and returns. Cointelegraph Research will evaluate multiple platforms and assess the sustainability of current DeFi and CeFi returns in its next report.
This article is for informational purposes only and does not represent investment advice, investment analysis, or an invitation to buy or sell financial instruments. Specifically, the document is not a substitute for individual investment or other advice.
Clarification: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information set forth herein should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
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