There is an old saying that "cash is king," but if it’s sitting in a bank account or, in the case of crypto – a wallet, it diminishes daily due to inflation. This is especially the case now as inflation in the United States breaks its 40-year record. While the dollar-cost-averaging (DCA) strategy allows an investor to minimize the effects of volatility by purchasing an unstable asset in time intervals, inflation still causes a decrease in a target asset’s value over time.
The Inflation Rate Conundrum
For instance, Solana (SOL) has a pre-set protocol inflation rate of 8%, and if the yield is not generated through farming or utilizing decentralized finance (DeFi), one’s holdings are depreciating at a rate of 8% per year. This highlights the ongoing struggle against inflation in cryptocurrency.
The Effects of Inflation on Cryptocurrency
Despite the U.S. Dollar Index (DXY) increasing by 17.3% in a year, as of July 13, 2022, the hopes of receiving significant returns in the bull market are still pushing investors to engage with volatile assets. This is because inflation is eating away at their holdings, making it challenging for them to achieve their investment goals.
The Role of Dollar-Cost-Averaging (DCA)
The DCA strategy allows an investor to minimize the effects of volatility by purchasing an unstable asset in time intervals. However, even with this strategy, inflation still causes a decrease in a target asset’s value over time. This is because the value of the asset is constantly being eroded due to the high inflation rate.
The Risks of Investing in Cryptocurrency
Investing in cryptocurrency comes with its own set of risks, including market volatility and liquidity risks. However, many crypto cycles have proven that real value capture can be attained during a bear market. For many investors, the current sentiment is that "buying and holding," combined with DCA, may be one of the best investment strategies during a crypto winter.
The Challenges of Timing the Market
In most cases, investors abstain from outright investment and amass capital to purchase assets when the macro condition improves. However, timing the market is challenging and is only feasible for active daily traders. In contrast, the average retail investor carries higher risks and is more vulnerable to losses coming from rapid market changes.
Where to Go?
In the midst of various calamities in the crypto universe, placing assets in staking nodes on-chain, locking in liquidity pools or generating yield through centralized exchanges all come with a hefty amount of risk. Given those uncertainties, the big question remains whether it’s best to just buy and hold.
The Risks of Yield Generation
Anchor Protocol, Celsius, and other yield platforms have recently demonstrated that if the foundation of yield generation is poorly backed by the tokenomics model or the platform’s investment decisions, too-good-to-be-true yields may be replaced by a wave of liquidations. Generating yield on idle digital assets via centralized or decentralized finance protocols with robust risk management, liquid rewards, and yield offerings that are not too aggressive is probably the least risky pathway for fighting inflation.
The Role of DeFi and CeFi in Yield Generation
Both DeFi and centralized finance (CeFi) protocols can offer varying levels of yields for identical digital assets. With DeFi protocols, the risk of lock-ups to generate marginal yield is yet another major factor, as it limits an investor’s ability to react quickly should the market adversely change.
The Risks of CeFi
While CeFi such as Gemini and Coinbase have demonstrated prudent user fund management with transparency, yield offerings on digital assets are insignificant. While staying within the risk management framework and not taking aggressive risks with the user’s funds is beneficial, the returns are relatively low.
Conclusion
Keeping a buying discipline within the DCA framework and doing research are crucial, but finding a low-risk solution generating substantial yields may be tricky. Meanwhile, a new crypto market cycle is set to bring developments that will hopefully bring novel solutions, attractive in both risk and returns. Cointelegraph Research evaluates multiple platforms and assesses the sustainability of current DeFi and CeFi yields in its upcoming report.
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Disclaimer
This article is for information purposes only and represents neither investment advice nor an investment analysis or an invitation to buy or sell financial instruments. Specifically, the document does not serve as a substitute for individual investment or other advice.