Fighting the crypto winter and token protocol inflation in 2022

There is an old saying, “cash is king,” but if it is 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. 

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.

However, 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.

In the upcoming “Blockchain Adoption and Use Cases: Finding Solutions in Surprising Ways” report, Cointelegraph Research will dig deeper into different solutions that will help to resist inflation in the bear market.

Download and purchase reports on the Cointelegraph Research Terminal.

Crypto winter is a period where anxiety, panic and depression start to burden investors. However, many crypto cycles have proven that real value capture can be attained during a bear market. For many, the current sentiment is that “buying and holding,” combined with DCA, may be one of the best investment strategies during a crypto winter.

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 hodl.

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.

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. Moreover, strategies may carry additional risks. For instance, Lido liquid staking with stETH derivative contracts is vulnerable to price divergence from the underlying asset. 

Although CeFi such as Gemini and Coinbase, unlike multiple other such platforms, 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.

While keeping a buying discipline within the DCA framework and doing research are crucial, 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.

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.