If you are willing to partake in crypto for the long term, consider passive income opportunities in bear markets, as many expert investors do to manage risk when markets are insolvent.
Bear markets aren’t as bad as they are depicted to be. In fact, for people willing to play the long game, those who have conviction in tokens they hold, bear markets are where to create generational wealth.
It is the accumulation phase down the road to wealth for your fifth-generation grandsons and granddaughters.
In this article, we will show you how to make passive income by leveraging DeFi protocols in the bear markets while breaking down the potential risks so you can make informed decisions.
Liquidity Provision: NO INFLATION – Revenue directly comes from Transaction Fees
Liquidity pools are the primary element that constitutes DeFi Swapping Pools. It is a component of the Automated Market Makers(AMM) that makes permissionless and decentralized trading possible.
The overall market becomes more efficient when liquidity providers supply liquidity to AMMs, creating new market pairs which introduce more volume to the traded assets. Also, providing liquidity to existing markets improves efficiency. It prevents slippage by making the trading pair less sensitive to sell-offs.
Liquidity providers get rewarded by the transaction fees generated through the pool they stake their tokens. Tokens are directly coming from other traders, so no inflation is needed. It is a peer-to-peer transaction with no dilution of tokens, making it a relatively safer option to earn passive income.
The process of providing liquidity is kind of interesting. You first choose a pool pair, for example, $CRO-$USDC. Then you get the same amount of value from both, for example, $500 worth of both $CRO and $USDC. Then you stake both to the pool, and it gives you LP Tokens that represent your stake in that particular pool for you to claim later. Like a key to a safe.
Lending(Money Markets): NO INFLATION – Revenue comes directly from Borrowers
Lending money in crypto is as straightforward as it can be. It is safe because it is known where the additional money/value comes from: the borrowers. People who want to have some leverage in their hands can get a loan through smart contracts as easily as getting it from the banks(arguably easier). Crypto Money Markets(Lending Platforms) don’t have 5000% APY rates as some ridiculous staking options that come from artificially and exponentially inflated tokens.
Crypto Money Markets have a simple skeuomorphic design.
Skeuomorphism means implementing an original design somewhere else that resembles its real-world counterparts but is implemented in a different environment native to the new platform. Example: physical newspaper -> digital newspaper. Paper turns into a digital screen. Same function, different implementation.
In the case of Crypto Lending, the middle man is smart contracts instead of banks. Lenders are directly connected to borrowers with some collateralization secured through smart contracts. That smart contract has to be deployed once for Crypto Money Markets to work efficiently, so there is no need for a smart contract to get a huge proportion as fees like banks do to sustain their financial maintenance. Because no agent actively works on a smart contract to maintain it, bye-bye clerks.
To lend your crypto to borrowers, you first lend your tokens to a smart contract; then, the code takes care of everything. Including lending it out, collecting the capital back, or in the case of margin call for the collateral provided the smart contract automatically liquidates it to return your capital, including the profit.
Validator Staking: SOME INFLATION – Revenue is from Chain Security and Transaction fees
Staking the native tokens of a Proof of Stake chain is relatively not straightforward. It is a passive income opportunity that taxes the entire chain by minting new tokens(or releasing locked tokens) in exchange for computation.
Taxing the chain for security is the fundamental underlying constituent of the blockchain technologies, and it is what powers Bitcoin, Ethereum, BNB Chain, Cronos, and the rest.
Estimated returns are mostly determined by fixed rates, derived from the yearly inflation rate of the given token in proportion to the number of validators in the ecosystem. Stakers can confidently know what to expect.
A user can do this through the Crypto.com DeFi wallet. It is pretty easy to do so. You buy some $CRO, send it to your DeFi wallet, and choose a validator to delegate your tokens to pool them with others and collectively partake in crypto mining. Voila, you now are a crypto native! For a full tutorial, check our related article here.
Staking Farms(LP Tokens): ARTIFICIAL INFLATION – Revenue comes from minting new tokens or distributing them from the treasury
There is a funny way to profit further from providing liquidity to liquidity pools. In the first subtitle of this article, we talked about giving liquidity and getting LP Tokens as a key to unstake our crypto to claim our base capital and the profit that comes from transaction fees.
You can also stake LP Tokens to a pool, but it is not like providing liquidity. It is by agreeing to lock your LP Tokens that act as a key to your funds in a liquidity pool for some time to earn additional crypto.
But if there is no liquidity pool and no one is making a trade, and no chain is being kept secure by mining, you may ask from where I earn the additional crypto?
It is by inflation through the native token that the platform offers to further bootstrap liquidity by giving you extra incentive to keep your tokens locked inside. It is like staking your tokens twice. In this case, the entire thing becomes a game of musical chairs. The first one to get out from the highly inflated cryptocurrency makes a bank and others are left with useless and valueless tokens.
Bootstrapping by inflating the native token of the platform can only work with well-established and notable treasuries with other valuable cryptocurrencies stored as a hedge, which provides real purchasing power that can be used for buying back the tokens which would also improve investors’ confidence.
Basic Staking Pool: ARTIFICIAL INFLATION – Revenue comes from minting new tokens or distributing them from the treasury
Basic staking pools are plainly providing the revenue to stakes by pure inflation.
An example: stake our $XX Token and get 110% APY of $XX Token.
Offering more of the same tokens if you lock some amount of that token in a smart contract is a blatant attempt to remove the tokens from circulation by reducing free supply in the market. It is not to say it is a scam. Still, there should be a strong reason for a staker that those distributed tokens to bootstrap the project will go up in value or even hold their current value if too much of it is distributed to be unlocked later on.
The route of staking(locking) tokens to receive the same tokens with medium to high interest should be taken when there is a deep conviction for the subject project with rational risk assessment.
The process of basic staking is very easy. Get the tokens, click on staking them, choose your timeframe for there is a lock period, and you are done.
Be Mindful of Opportunities but Don’t Forget to Manage Risk
An interesting part of crypto is that sometimes some things sound too good to be true, and they are true, but most of the time, they aren’t. Because crypto is at the bleeding edge of technology, consequently it cuts deep through financial services by being programmable money! However, opportunities shouldn’t be taken for granted. They should be verified by rational thinking and risk management by prioritizing due diligence before jumping into a bandwagon by the FOMO(fear of missing out).
Although bear markets provide an opportunity to accumulate future productive assets, it is important to choose a sustainable and realistic path. We don’t want something like $UST to happen to us by assuming there can be a non-Ponzi option of guaranteed 20% interest returns on your digital dollars as Anchor Protocol offered to $UST holders.
Logic is simple: While FED interest rates are sitting at a “whopping” 1%, which caused a huge market correction in the second quarter of 2022. It simply is that there can be no guaranteed 20% interest returns anywhere in the world. Caution: it is not to say you can’t increase your profits 20-fold relative to traditional finance or anything else; it is to say it can’t be guaranteed.
The principle among the best investors is that if you are in for huge profits, understand the underlying mechanics of the situation you are expecting the results from. This way you can manage your risk and you can survive to win eventually.
Fortune favors the brave, but you cannot be brave if your capital dies before markets are solvent again.