Stablecoin Strategy: How to Grow and Protect Your Portfolio
Any seasoned investor will most likely respond with three words: diversify, diversify, diversify. For generations, sensible people have understood not to put all of their eggs in one basket, should the basket fall off the wagon, and nowhere does this proverb apply more perfectly than in the volatile world of cryptocurrencies.
While most stock markets have hardly been dull in recent years, the volatility witnessed in cryptocurrency dwarfs the weekly single-digit percentage changes seen in equities. As we have seen in recent weeks, a daily shift of 20% up or down is not unusual in crypto, making for exciting watching.
Those who carefully monitor and trade these movements use intricate techniques — and usually have increased heart rates — that may generate good, terrible, or mixed outcomes. On the other hand. Busy individuals are unable to take advantage of split-second possibilities and must instead guarantee their portfolios can withstand turbulent times.
The Fundamentals of Stablecoins
Stablecoins can help with this. Stablecoins are cryptocurrencies whose values are fixed to real-world, “fiat” currencies, most notably the US dollar. There are several varieties of stablecoins, with some backed 1:1 by the fiat currency to which they are linked, some backed by a mix of other cryptocurrencies, and yet others using algorithms to keep their value near to their objectives.
USD Tether (USDT), USD Coin (USDC), True USD (TUSD), and Binance USD (BUSD) are four examples of currencies that are backed 1:1 by the US dollar, with USDC and TUSD conducting and releasing regular audits to confirm it.
DAI is another stablecoins pegged to USD. It has a different architecture than the ones mentioned above. It is a crypto over-collateralized stablecoins with no fiat backing. In contrast, Algorand and Frax are algorithmic stablecoins that leverage complex multi-token ecosystems and liquidity pools to keep a tight peg to one dollar.
Stablecoins backed by tangible fiat are among the most popular, with investors typically preferring the greater relationship to “real-world” currencies that they provide to their portfolios. Different stablecoins serve various purposes and interests, but if you’re new to stablecoins and/or cryptocurrency in general, a physically-backed stablecoins may be a good place to start.
Creating a Reliable Portfolio
Stablecoins could be a good starting point for building or protecting a cryptocurrency portfolio. This is because it will act as a buffer when the markets are volatile.
Suppose you have a $10,000 portfolio with 50% Bitcoin and 50% stablecoins, for example, and Bitcoin falls by 25%. In that case, your total portfolio will be down 12.5%, or $1,250, rather than $2,500 if you were 100% in Bitcoin (providing the US dollar and/or your stablecoin of choice haven’t crashed!). As a result, stablecoins may serve as a safety net for investors, allowing them to sleep better at night during turbulent times.
How much of your portfolio you wish to safeguard in this manner will be determined by how much risk you are willing to take. If keeping 50 percent of your portfolio intact is vital to you, then stablecoins may be the way to go.
However, keep in mind that if Bitcoin (or any more volatile cryptocurrency) swings the other way, you will lose out on the additional increase. In the above example, if Bitcoin rises by 25%, people owning 50% of a $10,000 portfolio in the asset would win $1,250, rather than $2,500 if they were all-in Bitcoin.
Investment protection and growth
Balancing risk with return is a critical component of any investing strategy. To decide, consider what you need and desire from your investments and the period you intend to make them.
There is always a trade-off to be made here, so consider how much of your portfolio you need to maintain “liquid” or available to spend. As part of this, you may put aside some of your stablecoins to purchase riskier assets at reduced costs when markets collapse. There are many alternatives to examine.
Ensuring your stablecoins holdings create an income is a terrific way to enhance your portfolio while also preserving it. Using the same example as before, if the stablecoin portion of a $10,000 portfolio earns a 10% APY, the overall portfolio would increase by $1,750 if the Bitcoin portion grew 25% over a year. In contrast, it would only lose $750 if the Bitcoin half fell 25% over a year.
APY incentives may help boost growth
The more interest you earn on your stablecoins, the more you may grow your portfolio while keeping it safe. Users of Sikka, for example, may earn double-digits APY on SIKKA tokens when staked on the protocol.
Additionally, Sikka produces synthetic tokens based on staked SIKKA tokens that can be used in other external protocols, amplifying the yield significantly.
Sikka’s stable asset borrowing/savings protocol architecture offers even greater safety for the more volatile component of investors’ portfolios, ensuring they continue to generate income while holding onto their assets amid dramatic market drops.
This is an excellent all-around approach for portfolio protection and growth. Holding a significant amount of stablecoins will act as a powerful buffer against market volatility, ensuring that the most crucial element of your portfolio is protected.
Producing passive income on a stablecoins position is critical for boosting returns while preserving your investments, and collecting gains on your more volatile holdings is even better. Putting these elements together in a well-diversified portfolio is often a prescription for long-term investing success.
Disclaimer: Although we use the terminology “stablecoin,” we don’t claim that these assets will always hold their peg. We call SIKKA a stable asset, reflecting that it’s over-collateralization price stability has a few days lag time.