Trading is a fundamental aspect of the cryptocurrency space. As exciting as crypto trading is, it is also highly risky and complex. This section gives an introductory guide to the various aspects of cryptocurrency trading.
Funding rates are periodic payments by cryptocurrency exchanges to traders based on the difference between the perpetual contract market and spot prices. Depending on your standpoint, you could either stand to receive payment or be the party paying it. Many cryptocurrency traders take advantage of crypto funding rates to earn passive income. In this guide, we look at how crypto funding rates work and how you can earn passive income from them.
What are traditional futures vs perpetual futures contracts in crypto trading?
To understand what is a funding rate, we must first know the difference between Traditional Futures and Perpetual Futurescontracts.
A key feature of traditional futures contracts is the expiration date. Traditional Futures contracts usually settle (expire) once a month or quarter. And when this happens, the settlement procedure begins. During this settlement period, the contract price converges with the spot price and then all open positions will expire.
Crypto-derivative exchanges like Binance often provide Perpetual Futures contracts, which have a similar structure to Traditional Futures contracts. Perpetual contracts, on the other hand, have a significant advantage. The advantage of perpetual contracts is that they do not have an expiry date. So traders can, for example, keep a short position open indefinitely unless they are liquidated.
Furthermore, Traditional Futures usually have a broker who will ask the trader to top up the amount accordingly based on “margin calls” i.e. the margin difference between the contract price and the spot price.
Due to the fact that perpetual futures contracts never settle or expire, cryptocurrency exchanges require a system to ensure that futures and index prices converge on a regular basis. This is where the concept of the funding rate comes in.
What is a Funding Rate?
Funding rates are periodic payments to long traders, which predict the market will go up, and short traders, which foresee the market will go down. The funding rate amount is based on the difference between the perpetual contract market and spot prices. So, depending on the traders’ position, they can either stand to pay or receive the funding rate.
When the funding rate is positive, the price of the perpetual contract is greater than the mark price. In such cases, long traders pay short traders. Conversely, the funding rate is negative when perpetual prices are below the mark price. This is when the short traders pay the long traders.
Why do Funding Rates Exist?
Futures contracts expire (settle) at a future date. When this happens, the futures price will meet with the current spot price. That is, the futures price is a predetermined spot price at a predetermined date in the future.
The futures market can be in one of two states relative to the spot price:
Contango: The futures market is trading above the spot price; or
Backwardation: The futures market is trading below the spot price.
The difference between the futures and spot market is called the “basis”.
Whilst perpetual contracts do not expire, they still need to settle at a spot price. However, there are sometimes differences in the cryptocurrency’s prices between the spot and futures prices on an exchange. This is despite the fact that they should be in line since they need to settle against each other over time.
Therefore, to keep the spot price and the perpetual contract prices in line, exchanges add an interest rate component (i.e. a funding rate). This funding rate incentivizes traders to take positions that help close the price gap, whilst penalizing those that do the opposite. In essence:
When the funding rate is positive, those who are long pay those who are short. This means those who are short will benefit. Therefore, people are incentivized to take short positions; and
When the funding rate is negative, those who are short pay those who are long. So if you are in a long position, you will receive the funding paid by those who are short.
Traders try to avoid paying the “penalty” by closing their long or short positions before the funding rate expires. When traders do this, the prices between the contracts and spot prices will begin to converge.
For example, when the contracts price is above the spot price, the funding rate is positive. In such cases, those who are long pay those who are short. Traders with long positions are encouraged to close their positions before the funding rate expires to avoid paying those with short positions. Meanwhile, traders are incentivized to open short positions because they can receive payment. The effect of this is that the contracts price will be pushed down and the gap between that and the spot price will be closed.
On the other hand, when the contract price is below the spot price, the funding rate is negative. Shorts will pay the longs. Therefore, traders with short positions will try and close their positions to avoid payment and open long positions to receive payment. Thus, the contract price will be increased to meet the spot price.
What is the Purpose of Funding Rates?
The purpose of funding rates is to prevent continued divergence in the perpetual contract market and the spot price for a cryptocurrency. And since prices of cryptocurrencies are consistently fluctuating, the funding rate has to be recalculated periodically. For example, some exchanges like Binance will recalculate their funding rates every 8 hours.
How to Make Money and Earn Passive Income from Funding Rates
One tip to make some “passive income” from funding rates is to buy AND short the exact same amount of the cryptocurrency you put your money on.
This method balances the positive and negative funding rates, where technically you do not have a position in that particular cryptocurrency market since it is counterbalanced.
However, your short trading will get paid on an hourly basis. So, you can get “passive income” on the side, even though overall it mostly turns out to be net value since you have the positive trades too.
A lot of large trading firms use this defunding method to get large sums of money quickly.
Conclusion
Crypto funding rates are an integral feature of the perpetual futures market Most cryptocurrency exchanges use funding rates to ensure that contract prices are always in line with spot prices. In turn, traders can benefit from taking advantage of funding rates to earn some passive income with funding fees.
To learn more about how to profit from funding rates on different exchanges, check out these articles:
Binance is the world’s most visited and used centralized cryptocurrency exchange in the world. The exchange has over 2 billion average daily volume and over 1.4 million transactions per second. The Binance ecosystem includes not only Binance exchange, but also BNB Chain, Trust Wallet, Binance card, and more. Many crypto traders like to take advantage of an exchange’s funding rates and fees to earn some profit and passive income. In this article, we look at how Binance funding rates and fees work, and how to profit from it.
Sign up for Binance and enjoy 20% off fees!
What is Binance?
Changpeng Zhao (CZ) and Ye He founded Binance in 2017. Since then, Binance has become the world’s most popular cryptocurrency exchange with the largest organic trading volume. Binance is available in most countries, including the United States under Binance.us (with the exception of a few states). The exchange also supports 600 cryptocurrencies on its international site and over 130 cryptocurrencies on Binance.us.
What are crypto funding rates?
Crypto funding rates are periodic payments of the price difference between perpetual contract markets and spot prices. Funding payments are made either to/by long or short traders depending on the funding rate.
Funding rates exist to align the perpetual contract price to the spot price. If the perpetual contract trading price is higher than the spot price, long position holders would pay short position holders. Conversely, if the perpetual contract trading price is lower than the spot price, short position holders pay long position holders.
As mentioned above, the purpose of funding rates is to prevent continued differences between the price s fo the perpetual contract markets and spot prices. Therefore, crypto funding rates are periodically recalculated. Binance recalculates its funding rates every 8 hours.
Users can locate the funding rate, and when the funding interval expires at the top of the Binance Futures page. So as seen in the below screenshot, the funding rate is -0.0014% and the funding period will expire in 3 hours 26 minutes.
Binance calculates the funding rate based on two factors: The interest rate, and the premium.
Binance Futures generally fixes the interest rate at 0.03% per day (i.e. 0.01 per funding interval). However, for BNBUSDT and BNBUSD, the interest rate is 0%. Meanwhile, the premium fluctuates depending on the price difference between the perpetual contract and the mark price. A large difference, or spread, equates to a high premium. On the other hand, a low premium means there is only a narrow difference between the two prices.
When the funding rate is positive, it means that the price of the perpetual contract is higher than the mark price. Whereas if the funding rate is negative, the perpetual prices are below the mark price.
Binance uses the following formula to calculate funding rates:
Funding Amount= Nominal Value of Positions x Funding Rate
Where Nominal Value of Positions= Mark Price x Contract Size
How are Binance funding rates paid?
When the funding rate is positive, long traders pay short traders. On the other hand, when the funding rate is negative, the short traders pay the longs. On Binance, funding rates are paid between users i.e. peer-to-peer. This means Binance does not take any fees from users paying or receiving the funding rates.
Funding payments are made every 8 hours at 00:00 UTC, 08:00 UTC, and 16:00 UTC. However, this can be subject to change in cases of extreme market volatility. Traders must have open positions 15 seconds before or after the specified funding times in order to be liable to pay or receive any funding fees.
How to profit from Binance funding rates?
The purpose of funding rates is to encourage traders to take positions that allow the perpetual contract prices to be in line with the spot market. So, traders can develop strategies that allow them to take advantage of funding rates and profit from it.
How to be notified of Binance funding rates
Binance offers a notification feature where they will send you an email/SMS/in-app notification when the funding rate reaches a certain percentage. To activate this feature, log in to your account and go to “Derivatives” and then “USDⓈ-M Futures”. Then, click on the “notification” button, “preference” and then “notification”. Here, you can set the funding fee trigger. The default trigger is 0.25%, meaning that Binance will send you a notification when the funding rate reaches 0.25%.
Crypto funding rate trends
Crypto funding rates are correlated with the price trend of the underlying asset, as seen from historical data. So the spot market generally dictates the funding rate.
The above diagram shows the correlation between Binance’s funding rates and Bitcoin prices for the period from 20 December 2019 to 20 January 2020. As can be seen, the rise in funding rates corresponds to a Bitcoin price pump.
Traders can see Binance’s historical funding rates here.
Were BlockFi’s assets held on FTX exchange, which is now bankrupt, and its funds hacked?BlockFi provides lending services to clients across the globe. In our previous article, we reported that BlockFi has paused its client withdrawals since 11th November 2022 due to lack of clarity” on the status of FTX.com, FTX US and Alameda.
Does BlockFi have exposure to FTX?
Shortly after BlockFi halted client withdrawals, the FTX Group filed for bankruptcy. Worse, FTX had been hacked and over US$600 million in funds were stolen. A lot of these funds belonged to FTX exchange users such as retail investors and even blockchain companies. Therefore, rumours have been swirling that BlockFi has substantial assets held in FTX.
On 14th November 2022, BlockFi issued an update addressing the rumours that a majority of its assets were held on FTX. Admitting they have “significant exposure” to FTX and their associated corporate entities.
On 28th November 2022, and during BlockFi’s bankruptcy hearing, the company revealed it has US$355 million stuck on FTX. On the other hand, Further, Alameda Research, an associated company of FTX, owes US$680 million to BlockFi.
On 28th November 2022, BlockFi also sued Emergent Fidelity Technologies, a company owned by FTX’s Sam Bankman-Fried (SBF). The lawsuit seeks SBF’s shares in Robinhood that were used as collateral as part of a pledge agreement.
Will BlockFi be able to recover any funds from FTX?
According to BlockFi’s 14th November 2022 update, BlockFi “…will continue to work on recovering all obligations owed to BlockFi.” BlockFi, however, expects there will be delays in the recovery of assets from FTX. This is because FTX, FTX.US and Alameda have filed for bankruptcy.
However, with the news that BlockFi has also filed for bankruptcy, it is starting to become uncertain whether BlockFi will be able to recover everything it has stuck on FTX.
BlockFi assured users they were independent of FTX
Previously, BlockFi Founder and COO Flori Marquez have assured users via Twitter that it is an independent business entity from FTX. Although, BlockFi does have a US$400 million line of credit from FTX.US (and not FTX.com). To learn more about the difference between FTX.com and FTX.us, check out our article- Key Similarities and Differences Between FTX.com and FTX.us
Twitter post from BlockFi Founder and COO Flori Marquez
What’s next for BlockFi?
On 28th November 2022, BlockFi filed for bankruptcy. During its first hearing, BlockFi expressed it intends to seek approval to restore withdrawals from BlockFi wallets. However, no Court application has been made yet and the Court has not decided whether customers will be allowed to make withdrawals.
BlockFi’s next bankruptcy hearing is presently scheduled for 9th January 2023 at 10:00 EST.
FTX EXCHANGE (INCLUDING FTX INTERNATIONAL AND FTX.US) ARE NO LONGER IN OPERATION
Both exchanges have filed for bankruptcy. Subsequently, the exchange was “hacked” and more than US$600 million worth of cryptocurrencies drained. The hacker is strongly rumoured to be a former FTX employee. For more about how this story unfolded and the latest news, check out these articles:
Technical analysis made easy with bullish chart patterns packed into a cheat sheet, so that you can make better trades at Bitcoin or other cryptos!
Is Technical Analysis Useful?
Crypto, as a new asset class, is volatile in nature. Its price fluctuates because it is heavily influenced by supply and demand, and it reflects how the public feels about the asset. This is known as market sentiment — bullish when prices are rising, bearish when prices are falling.
The market is constantly changing. In many cases, it does not matter how you feel about it, it only matters how the market is going to feel about it.
Market sentiment is a critical indicator to predict price movements and make investment decisions. An easy way to gauge market sentiment is by looking at chart patterns. They tend to repeat themselves, and once you are able to recognize them, it becomes easier to strategize your entries and exits.
However, it is important to note that they are NOT a guarantee that the market will move in that predicted direction. It should only serve as a frame of reference for you to feel how the market moves.
Bullish Chart Patterns
These are some of the most common bullish chart patterns you will see in the market. This cheat sheet will help you identify real-time candlestick patterns whenever you’re on Binance, or other crypto exchanges, so that you can time your entries better.
Ascending Triangle (Bullish)
Ascending Triangle (Bullish)
An ascending triangle is a bullish pattern which signifies the continuation of an uptrend, hence “ascending” triangle. It can be drawn onto the chart by (1) placing a horizontal line along the swing highs, which is the resistance, and then (2) drawing an ascending trend line along the swing lows, which is the support.
Ascending triangles often have more than two identical peak highs which allow for the resistance line to be horizontal.
The pattern completes itself when the trend breaks through the resistance, continuing the uptrend. This signifies that the asset has a high buying pressure, and buyers are most likely opting for a long position.
Falling Wedges (Bullish)
Falling Wedges (Bullish)
A falling wedge occurs when the trend line is sandwiched between two downwardly sloping lines, getting narrower as the resistance line gets closer to the support line. In this case, the line of resistance is steeper than the support.
It may seem like a downward trend but it isn’t. In fact, it is a reversal pattern. A falling wedge is usually indicative that an asset’s price will drop before it rises and breaks through the level of resistance, as shown in the second picture above.
A falling wedge usually signals the end of the consolidation phase that facilitated a pull back lower. The consolidation phase happens when buyers regroup and attract new buying interest. It can be explained as the “calm before the storm.”
Double Bottom (Bullish)
Double Bottom (Bullish)
A double bottom indicates a period of selling in which the price drops below the level of support. It will then rise to the level of resistance, before dropping again. It resembles a W shape, hence “double bottom.” Jokingly, the W stands for “win”!
Finally, the trend will reverse and begin an uptrend as the market becomes more bullish. It may seem like a bearish trend, but it is in fact a bullish reversal pattern. This signifies the end of a downtrend and a shift towards an uptrend.
It is important to note that most traders would jump the gun by entering a position before the pattern is activated. A double bottom is active only once the buyers break the neck line and secure a close above it. This is why it is important to wait for a close above the neck line before entering the market.
Rounding Bottom (Bullish)
Rounding Bottom (Bullish)
A rounding bottom is both a bullish continuation and a reversal. During an uptrend, the price will drop slightly before rising once more. This would be a bullish continuation.
Afterwards, the bullish reversal occurs when the price is in a downward trend and a rounding bottom forms before the trend reverses and continue upwards.
Bull Flag and Pennant (Bullish)
Bull Flag and Pennant (Bullish)
A bull flag signals that the overall uptrend is likely to continue, followed by a consolidation. It resembles a flag fluttering upwards in the wind.
Usually, there will be a significant increase during the early stages of the trend, before entering into a series of smaller upward or downward movements. This would be the pennant.
Pennants can be either bullish or bearish, and they can represent a continuation or a reversal. The picture above is an example of a bullish continuation.
While a pennant may seem similar to a wedge pattern, as mentioned in the previous section, wedges are much more narrower than pennants. Moreover, wedges differ from pennants because wedges are always ascending or descending, whereas pennants remain horizontal.
Summary
These are some of the most common bullish patterns you will see in the market. This cheat sheet will help you better time your entries when the market sentiment is bullish. However, it is important to note that crypto is volatile in general.
These chart patterns are NOT a guarantee that the market will move in that predicted direction. It should only serve as a frame of reference for you to feel how the market moves.
Crypto, as a new asset class, is volatile in nature. Its price fluctuates because it is heavily influenced by supply and demand, and it reflects how the public feels about the asset. This is known as market sentiment — bullish when prices are rising, bearish when prices are falling.
The market is constantly changing. In many cases, it does not matter how you feel about it, it only matters how the market is going to feel about it.
Market sentiment is a critical indicator to predict price movements and make investment decisions. An easy way to gauge market sentiment is by looking at chart patterns. They tend to repeat themselves, and once you are able to recognize them, it becomes easier to strategize your entries and exits.
However, it is important to note that they are NOT a guarantee that the market will move in that predicted direction. It should only serve as a frame of reference for you to feel how the market moves.
Bearish Chart Patterns
These are some of the most common bearish chart patterns you will see in the market. This cheat sheet will help you identify real-time candlestick patterns whenever you’re on Binance, FTX or other crypto exchanges, so that you can spot bearish trends earlier and better prepare your exits to cut loss.
Head and Shoulders (Bearish)
Head and Shoulders (Bearish)
The head and shoulders pattern is regarded as one of the most reliable trend reversal patterns. It is one of the top patterns that generally signals the end of an upward trend. The pattern is most prevalent among two of the largest coin by market cap, Bitcoin and Ethereum.
The pattern occurs when a large peak has two slightly smaller peak on its side, resembling the shape of a head in the middle and the shoulders on the sides.
The only thing you have to know is that all three peaks will fall back to the same level of support, also known as the “neckline.” Once the third peak has fallen back to the support line, it is likely that it will continue into a bearish downtrend. (Alprazolam) Traders would opt to short the market as a result.
But if the tide turns in favor of a bull market, the asset will attract buying pressure, and the price will reverse into a bullish uptrend as a result. This usually happens if the third peak is slightly higher than the first peak.
This is why the head and shoulder pattern is reliable because the result of the market being bullish or bearish is 50/50. There is a possibility the price action would go sideways following the third peak.
Descending Triangle (Bearish)
Descending Triangle (Bearish)
A descending triangle is a bearish pattern which signifies the continuation of a downtrend, hence “descending” triangle. It happens when the downward-sloping line of lower highs crosses the support line, continuing the downtrend.
This means that the market is dominated by sellers. Typically, traders will also enter a short position during a descending triangle in an attempt to profit from the continuous price drop.
Successively lower peaks are likely to occur and unlikely to reverse. However, it could turn out to be a false breakout in which the price moves sideways for some time after breaking through the support line.
Rising Wedges (Bearish)
Rising Wedges (Bearish)
A rising wedge occurs when the trend line is sandwiched between two upwardly slanted lines, getting narrower as the support line gets closer to the resistance line. In this case, the line of support is steeper than the resistance.
It may seem like an upward trend but it isn’t. In fact, it is a reversal pattern. A rising wedge is usually indicative that an asset’s price will rise before it drops and breaks through the level of support, as shown in the second picture above.
Generally, the asset’s price will eventually decline more permanently as a result. The rising wedge is difficult to spot because it resembles a bullish consolidation formation — the series of higher highs and higher lows keep the trend inherently bullish.
There are no measuring techniques to estimate the decline. But the next best thing is to look at the trading volume. If volume declines as the price rises, the wedge gets narrower. This marks the exhaustion of the buying trend which is a sign of a bearish reversal. Thus, a break of the support line accompanied by high volume confirms the bearish pattern.
Double Top (Bearish)
Double Top (Bearish)
A double top is when the price experiences a peak, before retracing back to the support line. It will then climb up once more before dropping more permanently. It resembles an M shape, hence “double top.” Jokingly, the M stands for working at “McDonalds” during the bear market!
It may seem like a bullish trend, but it is in fact a bearish reversal pattern. The buyers push the price higher, creating a series of higher highs and higher lows. However, at a certain point, the buyers cannot extend this bullish trend, and the second peak is registered as an equal high as a result. This is when the sellers target this weakness, pushing the price even lower.
Summary
These are some of the most common bearish patterns you will see in the market. This cheat sheet will help you spot bearish downtrends earlier so that you can exit and avoid loss. However, it is important to note that crypto is volatile in general.
These chart patterns are NOT a guarantee that the market will move in that predicted direction. It should only serve as a frame of reference for you to feel how the market moves.
All financial markets experience different cycles and market conditions. Since crypto asset prices also go through prolonged periods of bullish and bearish movements, the crypto market is no exception. The most dreaded market phase for crypto traders and investors is a declining or bearish phase, especially one that sustains itself for a long time.
General sentiments regarding the crypto and other financial markets are bleak during these periods, making many investors and crypto enthusiasts understandably worried. However, many traders still find ways to make money during unfavourable market conditions. To earn when the market is down, it is important to understand the concept of a bear market.
Check out our video comparing the crypto bear market in 2018 vs 2022, and how you can still profit during this period of downward price trends:
Table of Contents
What Is a Crypto Bear Market?
A bear or bearish market is a prolonged period characterized by falling prices of at least 20% across major crypto assets. Individual crypto assets may also be in a bear market if they experience a decline of 20% or more over an extended period. A bear market may occur due to widespread pessimism and negative market sentiment, as well as other internal or external factors. Additionally, a weak or slowing economy, pandemics, wars, and geopolitical crises are also characteristics that may cause a bear market.
7 Ways to Make Money and Profit in a Crypto Bear Market
Even when the market is in an overall downtrend, the blockchain and DeFi sector offers various ways for crypto traders and investors to still emerge profitable and victorious. Here are a few lucrative options that crypto investors and traders can utilize to make money and remain afloat in a bearish market phase.
Yield Farming
Yield Farming is a cryptocurrency investment method that allows investors to earn interest and rewards on their crypto assets. With yield farming, investors lend their crypto assets to DeFi platforms that hold these assets in a liquidity pool for a specified period. These pools provide liquidity to decentralized finance platforms that use the funds and ensure that the depositors earn some interest over time.
For those who are new, check out our video on the top yield farming mistakes all newbies make:
Crypto Staking
Staking is the process of earning rewards by locking up funds on a blockchain. Although similar to yield farming, this process does not use tokens for loans. Instead, Proof-of-Stake (PoS) blockchains use staking to validate transactions on their networks.
Users who stake more tokens get higher priority to validate transactions and earn more funds. Earnings from asset staking vary between platforms and depend on the governance community in each case. Before getting involved in yield farming or staking, always do your own research and make sure the returns are sustainable, as many times, there are ludicrous and unsustainable offerings that result in users losing all of their funds.
Crypto Savings and Crypto Lending
Savings and lending are good ways to make passive income from crypto during a bear market. These methods involve storing assets on a platform to earn simple interest on the deposits. Traders should remember that potential earnings mainly depend on the amount stored. Again, do your own research before allocating any capital to these types of platforms.
Forks and Airdrops
Altcoin forks and airdrops are also effective ways to make money in a bear market. A fork happens when users vote to diverge a blockchain and form another due to a material disagreement. This process leads to an airdrop where holders of the old token get the new tokens to participate in the forked blockchain. Depending on the value of the forked token, users can earn quite a bit by simply holding newly acquired tokens. (Modafinil)
Margin Trading
One of the most common ways to make money in a down-trending market is margin trading. This method is simply the process of trading crypto assets with funds from brokers. Margin trading allows users to trade with more money than they have in their accounts, thereby increasing potential profit. Although margin trading is an effective way to earn in a bear market, this method is only recommended to experienced crypto traders, as you can lose the entirety of your initial capital if the market moves in the opposite direction of your call.
Analyze Smaller DeFi Projects
A new DeFi project may have a low valuation after launch, but show huge promise in the long run. Crypto enthusiasts who take the time to analyze and research these projects can likely find and profit from the right ones. Even in a bear market, crypto investors who get in early enough tend to make gains from the increase in the asset prices of these crypto projects.
Dollar-Cost Averaging
One of the most effective ways to thrive in a bear market is to buy the dip. With dollar-cost averaging, investors buy assets at consistent intervals and properly observe market conditions before reinvesting. Since the cryptocurrency market’s volatility is unpredictable, it is nearly impossible to predict the lowest point before a reversal. Hence, dollar-cost averaging helps investors maximize profits by allowing them to buy at low points before the market becomes bullish. You lower your risk by lowering your potential downside and upside, but also allocating capital in a way where you will not only hit peaks and troughs.
Next Steps
Any crypto market condition has potential for profitability if you know how to play it right. The above strategies can help even novice crypto traders earn when the market is bearish. However, traders should note that their preferred strategy should depend on their risk tolerance and portfolio size. Traders should also learn to study the market to ensure that the chosen method will be effective at a particular time.
The crypto market, together with stock markets and the global economy in general, have been experiencing a significant drawdown for the past 6 months, leading to a confluence of factors ranging from high inflation, rate hikes, supply chain issues, energy crisis, to geopolitical instability. This combination packs a powerful punch for any risk-on markets, such as stocks and crypto, forcing retail and institutional investors to exit their capital from markets during these uncertain times.
With Bitcoin currently at $20k, down 70% from its $69k ATH, and the total altcoin marketcap being down 72% from its ATH, it is hard to deny that we’ve entered a bear market. But one question remains – is this anything like the bear market of 2018 and will it last equally as long as the previous one? Let’s dissect the situation and understand if this time is truly different, or if this is just a small bump in the road before an accelerated bull market.
Check out our video comparing the crypto bear market now (2022) and in 2018- and more importantly, how to STILL make money during this downturn:
2018 Bear Market
2017 saw the first true mass influx of retail interest into the crypto space. Bitcoin saw a rapid increase in price, everyone’s friend and grandma were kickstarting their own ICOs to attract funds, and regular companies added the blockchain keyword to their names to increase their share prices. 2017 was the wild west, as there was even less regulation than currently, and the space was rife with opportunists spawning scam projects to extract money from ignorant first-time crypto investors.
But, as with any bubble, it eventually pops. The crypto space was heavily overheated, with investors throwing money at everything that moved, doing minimal to no due diligence, just to get on the crypto hype train. Come 2018, things were starting to cool down and people were beginning to feel the pain. In less than 6 months after the peak ICO craze, over 90% of all the projects were already dead, with many more to go down with them in the rest of the 18-month long bear market.
At the peak of the market, a lot of FUD (fear, uncertainty and doubt) was beginning to circulate. Fear of regulation due to the prevalence of scams, and with China/Korea considering banning cryptocurrencies, things were not looking great for the crypto space. Right around the peak of the market, the Chicago Mercantile Exchange (CME) launched their Bitcoin futures product, which allowed institutional investors to get their hands dirty with Bitcoin. And, naturally, they did just that. With all of the FUD circulating and the market waiting to release a lot of pressure, institutions began shorting the market, creating an enormous sell pressure that brought BTC down to $7k, which kept grinding down to $3k till mid-2019.
2022 Bear Market
After Covid-19 hit, the market experienced a tiny two-month recession. As everyone was locked inside, demand dropped and supply shrunk as well. But once central banks began printing more money to help businesses and people via stimulus checks, many found themselves with a lot of extra cash and no way to spend it, so they turned to investing. After the March crash, the rest of 2020 saw the crypto market boom, calling it the “DeFi summer”, with BTC increasing in price by 400% by the end of the year. After that, it just kept on going. 2021 was the year of the NFTs and Metaverse, i.e. GameFi, with numerous projects sprouting up to capture some of the value amid all the hype.
After reaching its peak in November 2021, the crypto market has kept on steadily grinding down. Those who had called the peak in November aptly understood that the markets were overheated, inflation was starting to get out of hand, and the only way for governments to keep that under control was to begin quantitative tightening through rate hikes. Unfortunately, many were still in denial about the onset of the bear market way into April, which has resulted in a lot of people holding bags that might or might not recover.
Now the path forward seems clear. The US Federal Reserve’s hawkish monetary policy is causing markets a lot of necessary and unavoidable pain. Because the money printing since Covid-19 has been at such an unprecedented level, the Fed is finding it hard to slow down the inflation without causing a lot of damage. The result currently is a looming recession at the same time as inflation is still running rampant and driving up the prices of everything, all the while people’s incomes are stagnating and their expenses increasing.
When is the Next Bull Cycle?
At the moment, there are no clear signs of central banks reeling in their hawkish monetary policies. It might possibly take at least several months if not until the end of the year for the dust to settle, the bottom to come in, and for us to be ready for the next bull cycle once the Fed eases monetary restrictions. Continued geopolitical turbulence aside, the next bull cycle will certainly come, but it’s difficult to say what will be the narratives driving the rapid market expansion this time.
The two most touted bull market catalysts are the long-awaited Bitcoin spot ETF and the Ethereum Merge, which will cause the Ethereum network to transition from its wasteful Proof-of-Work mechanism to Proof-of-Stake. However, as is common in life and in markets, the most obvious things tend not to be the ones to catalyze huge changes. Markets are irrational, and a confluence of new narratives that will be born only in 6 months might very well end up triggering the next bull run.
How to Still Make Money During the Crypto Bear Market?
With great pain come great opportunities, and this bear market is no exception. This is the time for learning, accumulating, and paying attention to the market. In our latest video about the current bear market, we outline a few strategies that you can use as an investor to maximize upside potential come next bull run:
1) Dollar cost averaging (DCA) into your investments – instead of trying to catch the generational bottom and investing your whole capital in one go, better invest 20% of your capital at a time during a longer time period, so that way you are more likely to get a great average entry price and reap the profits in the future.
2) Doing lots of research – fundamental analysis of projects is the best way to ensure you invest in projects that have a real potential, and this is the time to be doing just that. Many projects will die during this bear market, so it’s important to source trustworthy information and be critical of everything in order to position yourself properly during the next stage of growth.
3) Diversify your portfolio – as we’ve seen in the past months, there’s no such thing as too big to fail in the crypto space. Instead of going all-in on one project, spreading risk across several projects will ensure your capital is better protected from a few bad investments.
4) Shorting the market – this should not be practiced by anyone who doesn’t have experience trading, as without proper risk management things can get pretty ugly very fast. During a downtrend, a way to make money is by shorting an asset, which essentially means you’re betting on an asset to go down in value.
Of course, none of this is financial advice, and we implore our readers to do their own research and never invest more than they are willing to lose. It’s a highly volatile market and not for the faint of heart.
STEPN is the most popular move-to-earn blockchain game in the crypto market this year after some significant adoption by the market and big moves with other major exchanges and well-known sneaker brands.
Move-to-earn is a new way to earn money through gaming with the novelty that it rewards not only digital activity within a game or app, but also physical activity. In short, the more you move in the real world, the more you are rewarded in your digital app.
STEPN has been crushing it lately after surpassing 300K daily active users (DAUs), receiving a strategic investment from the venture capital arm of Binance, and launching a unique collection of NFT sneakers on Binance NFT marketplace in partnership with sports brand ASICS.
What is STEPN?
STEPN is a move-to-earn health and fitness app with game elements built on Solana. Users equipped with sneaker NFTs can run and walk outdoors to earn tokens and NFT rewards. The funds earned can either be used to increase earnings in the app or can be withdrawn and sold. The mobile app has a built-in wallet, swap, marketplace, and rental system that allows non-crypto users to onboard.
How does STEPN work?
Anybody can earn tokens and NFTs in STEPN by downloading an app, buying NFT sneakers, and completing various forms of exercise. Similar to how Bitcoin mining works, users in STEPN have to prove they have physically worked out, at the cost of their own time and energy. This is validated by the app’s anti-cheating mechanics using GPS and machine-learning technology.
The tokens and NFTs are then minted to users’ wallets from the people, not from the game developer FindSatoshi Lab, known for its work on cryptocurrency wallet Solwallet. In this way, people can trade their tokens and NFTs 100% peer-to-peer and over time. STEPN has created an ecosystem where the value of tokens and NFTs is based on supply and demand.
STEPN tokens: GMT and GST
There are two types of tokens available to players, GMT (total supply of 6 billion) and GST (unlimited supply). GMT is a management token that allows users to increase their income. GST is an in-game token that users receive for in-game activity.
To create a balanced token ecosystem, the developers have decided not to limit the GMT governance token earning to a small group of people. Instead, they have made GMT and GST broadly accessible to ensure balance in the mining of these two tokens.
Since many GameFi projects with a similar dual-token economy have tended not to thrive, the question is raised about whether GST, with its unlimited supply, will go into a death spiral. STEPN’s model addresses this by making GST earning irrelevant at a higher level. As people approach the higher levels, they are presented with the option to choose which token to earn, and they would naturally want to earn the limited supply of GMT.
This will get amplified over time as more GMT is burned and more GMT use cases are released. This should reduce the GST token supply enough to balance the token value. If too many people are mining GMT, they will earn less than what they can with GST, so they will switch to earning GST. This will reduce the competition for earning GMT, and, in turn, make GMT mining profitable again.
Getting started with STEPN
To get started with STEPN, you must first download the app to your smartphone via Google Play or Apple Store. Then, following the on-screen instructions, you will need to create an account and receive an activation code.
You will be able to use the app fully once you have purchased your NFT sneakers from the in-app STEPN shop. Choose your sneakers based on your abilities. Once you have purchased the sneakers, open the game and start walking or running. You will start earning immediately.
How to join STEPN: Step-by-step guide
1. Download the App
First, you have to install the app on your smartphone. Depending on the model of your phone, you can do this either from the App Store or from Google Play.
2. Create an Account
After launching the app, you will need to enter your email address, to which you will receive a registration confirmation code. Enter your email address and press the ‘Send Code’ button. A code will be sent to your email address, and you will need to enter it in the corresponding field.
3. Obtain Activation Code
You then need to obtain an app activation code. To obtain the activation code, register in the STEPN community on one of the official social networks. Choose the social network that suits you best (Twitter, Telegram, Discord, etc.) and proceed according to the on-screen prompts. An activation code can also be received from a friend via invitation or bought from another user.
Once you have received the activation code, the main app screen will open. Click on the ‘Get activation code’ button. After you have entered your activation code, the app will open and the tutorial will start. Several screens will explain to you how to use the app.
4. Create a Crypto Wallet
You then need to create a crypto wallet in the STEPN app. Click on the wallet image in the top-right corner of the app. This will start the process of creating a crypto wallet, which will take a couple of minutes. While creating the wallet, you will be shown a secret phrase that you need to write down and keep in a safe place. Once the crypto wallet has been created, you will be taken back to the main app screen.
5. Start the Game
In the top-right corner, the token column will show zeros. To start the game, you need to deposit Solana (SOL) tokens into the crypto wallet you just created, in the amount that will allow you to purchase an NFT in the form of a sneaker. SOL can be bought on almost any major CEX or DEX.
6. Buy NFT Sneakers
TIP: Before you buy sneakers in STEPN, open the app and run for 10 minutes in running mode without sneakers. This is so that you can find the right type of sneaker for you. NFT sneakers are purchased in the shop. After buying the sneakers, wait until 25% of the energy has accumulated (approximately 6 hours) and then start the game. You are now ready to move-to-earn!
Playing and Moving to Earn
STEPN currently has solo mode only, in which users receive GST tokens as a reward for moving in the real world. This consumes virtual energy at a rate of 1 unit per 5 minutes of movement. All of these processes are only triggered after the purchase of NFT trainers. If the energy is at zero, no tokens are earned.
GST tokens, and subsequently GMT, are paid out depending on the following factors:
The level and attributes of NFT sneakers – more efficient sneakers cost more. Up until Level 29, users can only earn GST, and from Level 30 onwards, they can switch to earning GMT if they wish.
Sneaker comfort parameter – the higher it is, the more tokens are earned every minute.
Running speed – it is necessary to maintain the recommended speed range for the sneaker. If you deviate too much from it, earnings will be reduced by up to 90%.
Marathon and background modes are set to be added later. Marathon mode will be an entirely new playstyle and is aimed for release towards the end of 2022. Background mode will be added when the STEPN team feels the time is right to approach non-crypto users.
The Importance of Energy
Energy plays an important role in earning tokens in STEPN. As soon as you run out of energy, your earnings will stop. Only when energy is available will your movement be rewarded. The amount of energy determines how many tokens you can earn for walking and running.
To increase the amount of energy you have, you can buy more NFT sneakers or get hold of rarer ones. The more NFT sneakers you own in your inventory, the more energy they will automatically generate. Higher levels and rarity sneakers will give you more energy.
Strengths of STEPN
One of STEPN’s biggest strengths in the current market is the successful combination and implementation of GameFi and sports. This could be seen as a clear advantage over any competition as many crypto-native builders don’t have the connections or knowledge to replicate STEPN’s GPS technology and machine-learning anti-cheating mechanics.
Because the health concept of the game and its everyday practicality is relatively simple compared to other games and apps in crypto, STEPN is a prime candidate for mainstream adoption.
Weaknesses of STEPN
There are still quite large barriers to entry for the average person. The registration process is too complicated, and to start playing, new users need to first learn how to open and fund a crypto wallet and buy an NFT item. For a newbie, this is not as straightforward as it should be.
NFTs also cost between 2.5 and 10 SOL, and way upwards of $100 if you want the best sneakers. This means there is an element of ‘pay-to-earn’ about STEPN. However, at the moment, the return on investment (ROI) is in the region of a few weeks, which is not bad at all.
Conclusion
Making money while keeping healthy is a win-win, and as a sports GameFi product, STEPN has struck a decent balance between game elements that are not too rich and complex to stop non-gamers from entering, and sports elements that are not too difficult to stop non-athletic people from trying it out.
The tokenomics also create value for both users and the platform. As long as the concept remains simple and participating remains profitable for the average user, STEPN should continue its impressive adoption rate.
For more information on STEPN, follow their official channels:
Stablecoins are under the microscope right now following the collapse of Luna and UST, the stablecoin of the Terra ecosystem.
In this article, we look at the history of stablecoins, its pros and cons, why they are needed, and what are the risks are of utilizing them.
What is a Stablecoin?
A stablecoin is a cryptocurrency that maintains a fixed value because it is backed by reserves of other assets such as fiat currencies, securities, gold or precious metals, property, or any other assets as collateral.
There are four main types of stablecoins:
Fiat-Collateralized: Fiat-backed stablecoins are backed by real-world currencies such as US Dollars or British Pounds at a 1:1 ratio.
Commodity-Backed: Backed by precious commodities like gold, platinum, or real estate.
Crypto-Backed: Backed by other cryptocurrencies which are kept as a reserve to ensure price stability in the event of price fluctuations. Smart contracts can also be coded to ensure no trust is needed in third parties.
Algorithmic: These involve adjustments in the algorithm for controlling the supply and demand of stablecoins, usually in the form of two tokens: one a stablecoin and the other a cryptocurrency that backs the stablecoin.
Cryptocurrencies are decentralized and not controlled by centralized entities such as governments or regulatory bodies. They operate on supply-and-demand principles in a free market and can be volatile in nature.
Simply put, stablecoins allow investors and traders to ‘cash out’ of risky investments into another crypto coin that will not fluctuate wildly in value during times of market volatility.
History of Stablecoins
Stablecoins actually have a very long history, having been around since 2014 with BitUSD. BitUSD was created in July 2014 backed by the $BTS token and created by Dan Larimer and Charles Hoskinson, both pioneers in the cryptocurrency who went on to create EOS and Cardano ($ADA), respectively.
However, even the world’s first stablecoin was not without its issues. In late 2018, BitUSD lost its peg to the US Dollar, resulting in huge criticism from the cryptocurrency community. BitUSD is no longer commonly used, and many cryptocurrency exchanges no longer support this stablecoin.
The next stablecoin to be launched was NuBits in September 2014 and was functional for 3 years. Eventually, this stablecoin also fell- suffering 2 major crashes during which the peg was broken for an extended period of time. The first of these crashes was in 2016 when NuBits was depegged from the US Dollar for 3 months. This was likely because holders of NuBits suddenly sold their substantial holdings for Bitcoin, resulting in NuBits being unable to handle the large volumes of sell-offs and losing its peg. Surprisingly, after the 2016 crash, the marketcap of NuBits shot up by 1,500%. This was caused by people buying millions worth of NuBits in late December 2017 owing to concerns about the stability of Bitcoin, whilst the NuBits team was unable to print new coins to keep up with the demand, thereby driving up prices.
The second, and final major crash suffered by NuBits was in March 2018 which was caused by insufficient reserves of the coin, meaning that the NuBits team were unable to protect the coin when there was a dip in demand. Of course, large cryptocurrency holders immediately noticed the drop in NuBits prices and panic sold their positions, causing an even greater slide in price.
After the second NuBits depeg, the stablecoin had lost credibility with cryptocurrency investors. Some holders even threatened legal action against the NuBits team or went into Tether ($USDT) and/or TrueUSD instead.
Tether $USDT however has also weathered a few storms of its own, facing legal battles with the Securities and Exchange Commission (SEC), which also shook the confidence of the market. The legal action was eventually settled in 2021 with the parent company of Tether paying nearly US$60 million.
Despite this, cryptocurrency keeps evolving with each passing year as new innovations that were once met with speculation and distrust eventually become trusted by the market. Today there are many other stablecoin options out there such as USD Coin (USDC), Binance USD (BUSD), MakerDAO (DAI), Paxos Standard (PAX), and Gemini Dollar (GUSD) that provide alternatives to USDT.
Pros of Stablecoins
There are several reasons and numerous benefits to using stablecoins. In general, they are simply faster, cheaper, transparent, borderless, and programmable compared to fiat currencies. Some more benefits are listed below.
Stablecoins allow a quicker and easier way for investors to enter the crypto market by bridging fiat into stablecoins, which act like fiat currencies on exchanges.
Stablecoins are more efficient than fiat because they have the digital properties of other crypto tokens and can be moved around quicker and more efficiently than fiat money.
Stablecoins can be held as capital in non-custodial wallets such as Metamask, thus removing the need for third parties to intermediate.
Stablecoins allow for quicker, immediate peer-to-peer payments abroad that are semi-anonymous with much lower fees than fiat currencies.
Stablecoins can be used for holding, trading, borrowing, and lending abroad. When fiat-related regulatory processes are involved, even better.
Stablecoins can be staked to earn a higher yield than traditional finance in DeFi applications. When adding liquidity to protocols, they also minimize the risk of impermanent loss due to their price stability.
Blockchain data and tracking allows for a more transparent view of the market, giving investors more information on liquidity flows and thus greater decision-making power.
Many sectors of the economy and the unbanked population are benefiting from the use of stablecoins in remittance, escrow, payroll, settlement, and alternative banking that is self-custodial, cutting out intermediaries.
Cons of Stablecoins
Stablecoins used to be more controversial in the earlier days of crypto but have garnered more regulatory approval in recent years, minimizing many of the negative aspects.
Stablecoins usually require trust in a third party to ensure the coins are backed by the stated assets, which also means external audits are needed to ensure assets are accounted for.
There are lower yields on stablecoins in DeFi applications than on regular cryptos, however, these yields are still significantly higher than the interest rates offered by traditional banks.
Stablecoins utilized in DeFi applications are subject to the usual risks involved with unregulated cryptocurrency projects. The TerraLuna disaster was a perfect example of an extreme worst-case scenario for an algorithmic stablecoin.
Trial and error. Due to the relative infancy of stablecoins and the experimental nature of new technologies within crypto, there is still a risk when getting involved with newer projects or protocols.
Regulatory scrutiny. As the stablecoin market keeps growing and adding billions of dollars in value to the crypto market, it will generate increased interest from authorities. This can also be seen as a positive.
Conclusion
Stablecoins and their rapid proliferation across all blockchain protocols have brought more flexibility and adoption to the cryptocurrency industry. They are now embedded in the fabric of the market and are here to stay.
The onus remains on the individual investor to do your own research (DYOR) when deciding which stablecoin to hold. Find out who created it, whether it’s a trusted centralized business or a decentralized protocol managed by smart contracts. All the options are open to you when it comes to the safer management of risk in the crypto market.
One major question all new cryptocurrency investors ask is how to actually spend their cryptocurrencies. Unfortunately, cryptocurrency is just not as widely accepted as fiat currencies. Cryptocurrencies are also subject to huge price fluctuations and volatility. Therefore, to “lock in” the price of your cryptocurrencies and as a springboard to cashing out crypto to fiat, many have converted their cryptocurrencies to stablecoins instead. This allows one to keep their dollar-pegged coins in exchanges or cold/hot wallets, so when the moment to jump back into the bull run comes, they can do so within minutes without having to deal with fiat on-ramps. Alternatively, to easily convert their stablecoins to fiat currencies for spending.
Most have considered stablecoins to be a safe means of preserving their capital without experiencing volatility and having to leave the crypto ecosystem. After all, they’re… stable, right?
In most cases, they have been, but the most recent collapse of one of the largest and well-respected stablecoins, terraUSD (UST), and other less known ones, like neutrino USD (USDN) and DEI, has led people to question the stability of all stablecoins. But is this warranted? Isn’t there a bit more nuance to the mechanisms by which a coin retains its dollar or other fiat currency peg, each with their own risks and advantages?
Although a seemingly straightforward idea, stablecoins can be quite tricky to unpack and analyze, especially when talking about non-collateralized algorithmic stablecoins, which sound too good to be true, and in some cases, are. With this in mind, let’s take a look at stablecoins, what kinds are out there, how well they are doing, and what makes them tick.
Check out our latest video- Stablecoins: Are they safe? ($UST, $USDT, $USDC, $BUSD)
Stablecoins: Are they safe? ($UST, $USDT, $USDC, $BUSD)
Stablecoins – What Are They and How Are They Different?
Stablecoins are cryptocurrencies that are pegged 1:1 to the value of a fiat currency, meaning that, for example, every 1 USDT (USD Tether, the biggest market cap stablecoin) is worth 1 US Dollar. There are numerous stablecoins in circulation, with different coins having different mechanisms for collateralizing their stablecoins.
The most commonly used feature to categorize stablecoins is by looking at how each of them backs their tokens, e.g. their collateral/reserves. By doing that, we can focus on using more narrow criteria for evaluating and comparing stablecoins based on the risks and advantages that stem from the chosen collateralization mechanism. Broadly speaking, there are three main types of stablecoins: Fiat-collaterized stablecoins, crypto-collaterized stablecoins and algorithmic stablecoins.
Fiat-collateralized Stablecoins
By far the most popular type, fiat-collateralized stablecoins occupy the top 3 spots (USDT, USDC, BUSD) among stablecoins by market cap, accounting for roughly 94% of the total ~$155 billion stablecoin supply.
Their working principle is the most straightforward to understand. Each of these coins is backed by a combination of real USD cash reserves, US Treasury Bills, and commercial papers (liquid short-term debt issued by companies).
Crypto-collateralized Stablecoins
Similar to fiat-backed stablecoins, crypto-backed stablecoins use cryptocurrencies as collateral, and smart contracts and, typically, governance tokens to monitor price stability. Due to the volatile nature of cryptocurrencies, crypto-backed stablecoins are over-collateralized (150% for DAI, for example) to account for periods in the market when prices of the collateral assets keep going down. Learn more about DAI.
Compared to fiat-backed stablecoins, they’ve witnessed a much slower rate of adoption. However, based on data, it does seem that they are slowly starting to gain momentum and dominance over the past years, as people begin to develop trust in the previously experimental mechanisms, which is to be expected.
There are also hybrid collateral tokens such as Reserve Tokens (RSV) that are backed by both digital and fiat assets.
By far the most technically complex and technologically least mature, algorithmic stablecoins rely on on-chain algorithms to handle changes in supply and demand between the stablecoins and their sister tokens that back them by burning and minting them in both directions through a process called seigniorage, to maintain a dollar peg. This, however, only works while there isn’t a strong downward pressure on the peg that keeps stressing the mechanism, which can lead to a downward death spiral during which both tokens keep losing value as users keep panic selling at the same time as the algorithm tries to stabilize the price. Although not fully collapsed, neutrinoUSD and its Waves protocol have been experiencing extreme turbulence for the better part of two months, making users lose confidence in its stability, especially as its working mechanism is very similar to that of UST.
On the less extreme side of algo-stables lie hybrid stablecoins, or fractional-algorithmic stablecoins, such as FRAX, which is partly backed by collateral, and partly algorithmically by adjusting the collateral based on the deviation of FRAX from the $1 peg.
Learn more with our Ultimate Guide to Algorithmic Stablecoins:
https://www.youtube.com/watch?v=hdmotWPNVdQ
Criteria for Comparing Stablecoins
Decentralization
The impact of regional regulations can be a risk many would not find appealing. It’s completely reasonable to expect that the industry would be capable of creating largely decentralized stablecoins that are collateralized by one or more decentralized cryptocurrencies, and governed by a DAO. Such is the nature of MakerDAO and its DAI stablecoin, which has shown its peg strength throughout this year and especially during the most recent catastrophic UST collapse. There is a small caveat, however.
The largest crypto-asset backed stablecoin with a $6.5 billion market cap, DAI, is still heavily backed by the second largest market cap stablecoin, USDC, which itself is backed by fiat reserves, calling into question whether it truly is as decentralized as it purports itself to be. The reality is not as grim as it might seem. Even though USDC and USDP (another fiat-backed stablecoin) comprise 28.1% of the total DAI collateral, ETH and WBTC (Wrapped BTC) boast an impressive 58.6% collateral, tipping the collateralization balance in favour of decentralized digital currencies instead of centralized stablecoins. In addition, the Maker platform with the MKR and DAI tokens, together with all of its smart contracts, lives on the Ethereum blockchain, making it truly trustless and decentralized, even if a good portion of the collateral is not.
On the other hand, the decentralization of all stablecoins might not be necessary, or even desirable, as properly regulated stablecoins almost by definition require a legal entity or a consortium of entities with exposure to major governmental bodies (especially in the US) to be behind the stablecoins, so that there is little doubt about who is responsible for ensuring a full fiat backing of their stablecoins. However, this would imply heavy centralization of control over the stablecoin supply and the general mechanisms for issuance, governance, and, crucially, potential censorship.
A centralized stablecoin is a double-edged sword. On one hand, it gives unprecedented power over a vast supply of stablecoins that a decentralization-focused industry heavily relies on to do daily business. On the other hand, it allows for companies like Binance, who are behind the popular BUSD stablecoin, to prioritize user safety and regulatory compliance, giving users peace of mind about the safety of their assets.
Thus, a strong argument can be made to safely onboard millions of new users through reasonably regulated stablecoins. It’s important for this industry to appreciate the need to offer a wide range of stablecoin alternatives, from centralized to decentralized, for users with different risk appetites and technical competencies in order to accelerate crypto adoption worldwide.
Compliance & Transparency
Closely tied with the level of decentralization of a stablecoin, regulatory compliance and transparency are absolutely crucial for companies who are backing their coins with cash reserves, and who desire to find strong and growing support by institutions, companies, and investors looking to enter the space, but who have been apprehensive to do so due to concerns about a potential inability to redeem their tokens for dollars.
It’s important to note that regulatory compliance is largely a concern for stablecoins operated by corporations, as they are the ones operating mostly behind closed doors, with most of the details about their inner workings, decisions, and collateralization mechanisms being hidden from the end-users and legislators. In such situations, it is more than reasonable to expect a regulatory body to force at least some oversight over how exactly these companies are operating their stablecoins and whether they do possess the collateral they claim to have.
The same can’t be said about open-source, decentralized governance-powered, blockchain-native, crypto asset-backed, and over-collateralized stablecoins that are being operated completely out in the open, with every decision, piece of code, and capital relocation in smart contract escrow accounts being registered on-chain. For coins such as DAI, compliance and transparency are baked into the protocol, and it can be reasonably argued that the necessity for any kind of regulatory oversight is moot, as the community and the free market cryptoeconomic pressures have organically grown a robust and freely auditable stablecoin that’s fully backed by digital currencies.
For fiat-backed currencies, the two large-cap extremes in the range of transparency and compliance are BUSD and USDT. While BUSD has been extensively cooperating with the New York State Department of Financial Services (NYFDS), and showing that every BUSD is backed by an equivalent amount of cash, USDT has been under significant scrutiny over the past years regarding its executives and the USDT backing. These allegations, combined with the lack of transparency by Tether, have made many worry whether USDT is a house of cards about to crumble as the Chinese real estate bubble begins to pop.
Financial Sustainability
In addition to the existential risks posed by the type of collateral chosen for stablecoin reserves, another source of risk that can be analyzed for a project is its cashflow. Changes in the cashflow of a protocol can offer clues about the health of the ecosystem and its ability to withstand market shocks.
Understanding how a stablecoin protocol spends and, most importantly, earns its money, is key to making predictions about the long term sustainability of such projects. Without proper long term revenue models, protocols are left to come up with highly appealing but unsustainable practices such as incredibly high yields on stablecoin deposits (such as UST had) or very low to non-existent trading fees to make it appealing for users to use that stablecoin as their dominant medium of exchange. These kinds of practices sooner or later come back to bite them in the ass, as there is a very high probability that the high yields and low fees are paid for not from organic revenues, but rather from alternative revenue sources (as is the case for Binance), or from project’s treasury/VC investment money, in hopes that they would be able to subsidize the attractive rates for long enough to reach a critical mass of users to then eventually either lower the yields and increase the fees, or simply keep running a ponzi-like operation for as long as possible.
Risks are High, always DYOR (Do Your Own Research)
If something in crypto sounds too good to be true, it very likely is. The most recent example of this was the Anchor Protocol’s 19.5% yield for UST deposits, which should’ve been a huge red flag, and yet many, many individuals chose to deposit their life savings into a supposedly stable UST in hopes of an unsustainably high APY.
For a $50 billion project to go down to virtually nothing in a matter of weeks is nothing short of astonishing, and should serve us all as a warning to do our due diligence thoroughly, and ask uncomfortable questions, even if the whole market seems to be fully on-board with a project.
As the saying goes, “Follow the money.” If a protocol is promising unbelievable returns, if the company behind a stablecoin year after year refuses to prove their fiat reserves, and if a algorithmic stablecoin seems to have a fishy peg stabilizing mechanism that can only work in an up-only environment, then you should exercise caution. And as with everything, whether it be cryptocurrencies or stocks etc, ask yourself if you have really fully done your research and never put in more money than you can afford to lose.
