Many investors miss out on gains during the bear market because it is perceived to be harder to trade in a downwards trend. To trade an upwards trend is straightforward: buy a coin, hodl, and take profits. To trade a downwards trend is just as simple. This article outlines how investors can take advantage of the prevailing market sentiment and short the market using the popular lending protocol Aave.
DeFi Lending Protocols
Lending is one of the most fundamental functions of TradFi (traditional finance) entities and has fast become one of the most significant growth areas within DeFi (decentralised finance). The middle man has been removed and replaced with over-collateralisation. DeFi lending protocols are open and permissionless; thus anyone who has crypto to collateralise is eligible to access funds.
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They were initially designed to create a global capital market to join people seeking to generate interest on idle funds and those who wanted to access funds for productive ventures. These protocols have quickly been repurposed for trading leverage. Investors can collateralise a stable asset, take a loan out against this asset, and thereby gain greater exposure to the market.
Collateralising an asset will always trump selling it and is a technique the wealthy frequently employ. The asset continues to appreciate and is leveraged to allow further accumulation of assets.
Shorting on Aave
1. Go to Aave and launch the app
2. Connect a non-custodial wallet
3. Select the asset to collateralise
The best asset to collateralise is WBTC. It is the most stable asset and the asset that will appreciate the most. WBTC is just an Ethereum token that can be swapped on a 1:1 basis for BTC allowing participants to own Bitcoin whilst interacting with Ethereum’s DeFi ecosystem.
4. Borrow the token you want to short, for example, MATIC
Borrow 500 Matic tokens at a price of $0.47 per token, giving a total loan amount of $235.70. Never exceed a loan-to-value ratio of 50%, meaning your collateral is always twice the value of your loan. This avoids liquidation risk in the case of market volatility.
5. Immadietly swap the borrowed token for USDC on QuickSwap
Swap 500 Matic for $235 USDC
6. Collateralise the USDC on Aave to boost loan health
7. Wait for the borrowed token’s price to drop
In this example, over the coming weeks, Matic falls to $0.25 per token.
8. Buy back borrowed token on QuickSwap with USDC and repay the loan
At a price of $0.25 per token, 500 Matic would cost $125. After repaying the loan, the investor would make a profit of $110.
9. Congratulations on shorting the market
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