Money Market Leverage Strategies
Leverage Your Profits Regardless of Bull or Bear Markets
Gm, my beautiful DeFi frens,
Today, let’s dive deep into leveraging Money Markets in DeFi to boost your profitability. A while back, I talked about using money markets to scoop up more assets, like property, to generate passive income while keeping your crypto holdings intact. If you missed that, check it out here: Leverage Your Crypto in a Smart Way to Reach Freedom.
Now, let’s expand on using money markets, one of my go-to strategies for leveraging, and I believe it's safer than many others out there. Whether the market is bullish or bearish, I’ve got tips for both.
Strategies for Bull Markets
When the market is on the rise, consider this move: on big corrections, supply your long-term holdings to a money market. Why? You can borrow stablecoins against them. Use these stablecoins to buy the dips in strong assets with the highest conviction or deploy them in various DeFi strategies.
If you secure a loan at a low interest rate, aim to park your borrowed stablecoins in protocols where the yield is significantly higher than what you're paying in interest on your borrow. This way, not only do you enhance your returns, but you can also engage in farming airdrops by deposit your assets into money market, take a stablecoin loan, and use those to farm airdrops.
We are in an ideal market for this strategy, especially today. It's time to borrow some stablecoins, buy the dips in the strongest assets, and farm the Ethena airdrop with borrowed stablecoins.
Strategies for Bear Markets
Bear markets are a bit trickier, but here’s a strategy for those who find it hard to jump back into the market after taking profits in stablecoins. If you’re seeing a confirmed bear trend (think lower lows and higher lows on daily or weekly charts), supply your stablecoins to a money market. Then, borrow a cryptocurrency you believe will drop the most. Swap it immediately for stablecoins.
To select which asset will likely decline the most, focus on tokenomics, inflation rates, unlocking schedules, allocations to VCs, team dynamics, product innovation, and the protocol's use case in a bear market. If you combine the synergies of all these factors, you'll find the right asset.
Here’s the clever part: you need to repay your loan in the asset you borrowed, so if that asset drop by 70% during the bear market, you're effectively buying it back cheaper when it's time to repay. You've just made a profit on the difference, plus any extra earnings from using the swapped stablecoins. It’s like shorting the asset, but with a high probability of positive interest on your loan, including a pretty nice amount of stablecoins for the next DeFi operation that will generate you additional income.
When it's time to close out your positions, simply swap the necessary amount of stablecoins back into the asset you owe, and repay the loan. I recommend not timing the exact bottom to repay, but as always the correct approach is DCA repayment. That is, for example, if you make additional profits from the stablecoins, always use 20% of the profits to pay back the loan.
Why This Works?
Using money markets this way provides flexibility and enhances your capacity to make moves based on market conditions. You're not just sitting on your assets; you're actively using them to generate more value, whether through gaining on dips in bull markets or benefitting from declines in bear markets.
Barking up
I use these strategies regularly - they're my favorite approach to the market. However, you can't afford to be greedy; don't let the market liquidate you, but the upside is, even if the market does liquidate your collateral, you can still keep your borrow, so you have something left. Just make sure to maintain a healthy LTV ratio for your borrow to stay safe. Also, remember that you need to repay your borrow regularly. These strategies are meant to help you capitalize in times when you need it most - to leverage your profits, not to keep your borrows open indefinitely or to increase them significantly each month. You must set limits. Leverage through money markets is a good servant but a bad master.
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Not financial or tax advice. This article is for informational purposes only and should not be construed as tax or financial advice.