When do you exit the DeFi rollercoaster?
In search of rules of thumb for DeFi bets.
Good evening friends and internet strangers,
I accidentally caused a crypto market crash this weekend. Sorry about that.
Here’s a Tweet from Friday night at 9:30pm, where I’m asking the world for advice on when I should consider taking money out of DeFi/crypto.
Immediately afterwards, the Bitcoin price fell off a cliff and dipped 20-25% (a friend of mine managed to buy BTC at $41,000 from some panic seller!).
I guess Kyle, who replied to my Tweet, had a decent point:
Jokes aside though, it was a volatile weekend in cryptoland, but nothing too freaky in the grand scheme of things. I’m still hoping for a proper crash so I can buy some discounted coins at some point.
But my original question still stands. When might one want to get out, either of crypto generally, or out of a given DeFi protocol specifically?
In the public stock market, the answer is simple: never get out. Just stay invested forever if you can, close your eyes on red days, and hold on for dear life (if you want to tax optimize like the ultra-wealthy, literally never sell – instead, borrow cheap cash when you need it using your stock portfolio as collateral). You’ll probably do OK if your timeline is 30+ years. The model is tried and tested over decades – the stock market, for all its flaws, is pretty Lindy (note: with that said, we might be near the end of the “long-term debt cycle”, in which case the downfall might be pretty rough. Read more here, or listen to wise man Ray Dalio).
With crypto in general, you might take the same stand. If you believe the technology is here to stay, and that BTC/ETH/some other legit cryptocurrency has become too big to fail, just buy and hold forever.
With DeFi though, this strategy sounds dumb. Most DeFi protocols are too new to be Lindy at all, and the chance of you finding one that will work for years and years seems extremely slim. Protocols blow up all the time (see $TITAN, or the more recent Snowbank as examples), and most of the things that launch these days will presumably go to zero. For all we know, DeFi itself might even be a short-lived fad.
Let’s consider a concrete example:
I have about $1500 put into a protocol called Tomb.Finance, which currently pays an almost 500% annualized percentage rate of return. This means that I get roughly $20 or so paid out EVERY SINGLE DAY just from staking $1500. Ridiculous.
But how long can it last? Nobody knows!
All kinds of things can wipe out this scheme. The value of the $TSHARE token I’ve staked can go to zero (it did drop 20% today..), the value of the $TOMB token that I get paid out in can go to zero, the percentage return can drop significantly because too much money flows in to the protocol, the protocol’s liquidity can run dry if many people want to take out their money at the same time… and so on and so forth. This can happen tomorrow, next week, in 3 months, or never.
On the other hand, the upside is ridiculous as well. You double your money in under 3 months if the yield stays the same and the underlying value of the coins stays still. If the coin value increases AND the yield keeps flowing.. well, it’s anyone’s guess where this could go.
Facing such a wide range of outcomes across countless different protocols, I need some rules of thumb for when to exit. If not, I’ll probably just hang on until the bitter end, wherever that may be. So… anyone got any suggestions? 🤠
That’s all for tonight. More questions than answers this time around!
As always, feel free to hit reply, or to forward the newsletter to a friend. Good night :)