8 Bear Market Investment Strategies

Alpha-packed strategies for trading crypto like a pro
May 18, 20238 min read

It’s a bore market. Prices have chopped around for the past three months, and liquidity has slowly drained from the crypto economy. Aside from the occasional, short-lived memecoin mania, the markets are pretty dull right now.

However, if you’re like me, you always have to scratch that degen itch. The portfolio must be put to work.

Trading these crabby conditions is treacherous. The global and permissionless nature of DeFi lets traders put their assets to work in a variety of different ways, but it’s very easy to chop yourself up overtrading in a minuscule range.

You can copy "trading strategies" from shady influencers on Twitter... but nothing beats knowing how to make the trade yourself. Below, we’ll go over some of the top trading strategies and ways in which you can earn some yield to help grow your stack.

We’ll give the first two for free - but for all the alpha, you’ll have to be a Bankless premium subscriber. What are you waiting for?

1. Leveraged Staking

  • Difficulty: Easy
  • Risk Rating: Medium
  • Potential Opportunities: icETH, InstaDapp, Brahma Finance

⛰️ Strategy Overview:

Leveraged staking is a strategy that can be employed to earn a higher staking yield (while taking on a commensurate amount of risk).

This strategy involves recursively levering up on a liquid staking derivative (LSD) by borrowing “raw” ETH against it in a money market in order to capture the spread between the leveraged staking yield and the borrowing cost.

Or in layman's terms: Borrowing ETH, swapping it back to the LSD, and then re-depositing the LSD to borrow more ETH.

This dual protocol requirement means that for now, the strategy is primarily limited to Lido's stETH and Rocket Pool's rETH.

While this can be done manually, there are many automated vaults, such as those offered by InstaDapp and Brahma, as well as tradable tokens like Index Coop’s icETH that automate the strategies, execution and risk management.

🧰 Strategy Execution:

Under the hood, leveraged staking works as follows:

  1. Buy an LSD or stake ETH with one
  2. Deposit your LSD into a supported money market
  3. Borrow ETH against your LSD (Be mindful of your health factor!)
  4. Swap the borrowed ETH for more of the LSD
  5. Repeat Steps 2-4
  6. Capture the spread between the ETH stake rate and the ETH borrow cost

⚠️ Risks:

Leveraged staking strategies come with many risks including:

  • Liquidation risk from the price of the LSD falling relative to ETH
  • Money market bad debt risk
  • Interest rate and staking yield risk which can erode the spread
  • Individual LSD risk
  • Smart contract risk for the LSD, money market, and automated strategy provider

2. Basis Trade

  • Difficulty: Hard
  • Risk Rating: High

⛰️ Strategy Overview:

A basis trade is a strategy that seeks to capture yield from perpetual futures contracts. Perpetuals are future contracts that continuously roll over and are the most widely traded derivative in crypto.

To tether the price of a perps contract to the spot price of the underlying asset it is tracking, traders will make continuous interest payments at a rate known as the funding rate.

With a basis trade, one is looking to earn the yield from funding while hedging out their price exposure to the underlying asset.

To do so, a trader must construct what’s known as a delta-neutral position, which refers to a flat position with no price exposure in either direction.

Basis trades are most easily executed when funding rates are positive, meaning that long positions are paying the shorts who are taking the other side of the trade.

They can be executed on decentralized exchanges such as dYdX as well as centralized exchanges like Binance. For a list of the hottest perpetual trading platforms, see The Perks of Decentralized Perps on the Bankless newsletter.

🧰 Strategy Execution:

To execute the strategy, you’ll have to do the following (we’ll assume that funding is positive):

(For this, and following strategies we’ll be using ETH as the asset in our examples. This strategy can apply to assets other than ETH.)

  1. Take a long ETH spot position
  2. Open a short ETH perps position in equal size to hedge out price exposure
  3. Earn funding payments

⚠️ Risks:

Basis trades come with a variety of different risk factors including:

  • Liquidation risk on the short perpetuals position
  • Interest rate risk from an increase in funding rates
  • Smart contract and oracle risk on decentralized perpetuals exchanges
  • Custodial risk on centralized exchanges

3. Depositing into Liquity’s Stability Pool

  • Difficulty: Easy
  • Risk Rating: Low

⛰️ Strategy Overview:

Liquity’s Stability Pool enables users to effectively DCA into ETH by buying liquidations.

Liquity is a lending protocol where users can mint a stablecoin, LUSD, by using ETH as collateral. When a user's position falls below a 110% collateralization ratio, it’s eligible to be liquidated.

These liquidations are carried out through what’s known as the Stability Pool, which is a liquidity pool where LUSD holders can deposit their stablecoins in exchange for the right to carry out these liquidations.

When one does occur, depositors in the stability pool will essentially be swapping a portion of their LUSD in exchange for the liquidated ETH.

Given that liquidations often occur during periods when prices are falling dramatically, this strategy can effectively be a way to DCA from stablecoins into ETH during times of acute market weakness.

As a bonus perk, you can also earn LQTY rewards, Liquity’s governance token, from depositing into the pool.

🧰 Strategy Execution:

Executing on this strategy is straightforward. To do so, all a user has to do is:

  1. Deposit LUSD into the stability pool
  2. Claim ETH and LQTY rewards
  3. Redeem their share of remaining LUSD when they wish to exit

⚠️ Risks:

Despite its simplicity, there are still a variety of risks that Stability Pool deposits take on including:

  • Bad debt risk from underwater positions being unable to be liquidated
  • LUSD upwards de-peg risk, where liquidating positions becomes unprofitable
  • Smart contract risk

4. Delta Neutral Staking

  • Difficulty: Medium
  • Risk Rating: High
  • Potential Opportunities: ETH, SOL, AXS, SNX, GMX

⛰️ Strategy Overview:

Delta Neutral Staking is similar to a basis trade in that it involves utilizing perps to construct a flat position in order to capture a source of yield.

However, this strategy is different in that rather than isolating the funding rate, it instead focuses on earning a staking yield. This means the strategy can apply to L1s as well as single-sided staking programs for governance tokens with perps such as CVX, SNX, AXS, and others.

🧰 Strategy Execution:

A trader can execute this strategy through the following process:

  1. Take a long ETH spot position
  2. Stake said ETH in a liquid staking protocol
  3. Open a short ETH position of equal size on a perpetuals exchange to hedge price risk
  4. Collect the net yield between the staking yield and the funding rate on the short position

⚠️ Risks:

The risks of this strategy are similar to that of a basis trade. They include:

  • Liquidation risk on the short-perpetuals position
  • Slashing and/or smart contract risk
  • Interest rate risk from staking yields compressing and/or funding rates rising

5. Single Sided LPing on Uniswap V3

  • Difficulty: Medium
  • Risk Rating: Medium

⛰️ Strategy Overview:

Single-sided liquidity provision on Uniswap V3 is a way in which a trader can enter or exit a position with minimal slippage while earning LP fees.

With this strategy, a trader will deposit a single token, rather than two, into a Uniswap liquidity pool at a price range that is either above or below the other token in the pool's current price.

This strategy works similar to a limit order, as when price begins to fall into their range, the trader will see the asset they deposited gradually swapped into the other asset in the pool.

This may seem abstract, so let’s go through an example.

Let’s say that ETH is trading at $1500 and you want to take profits into USDC between $1800 and $2000.

To do so, you’d deposit ETH into the ETH/USDC pool and select a range of $1800-2000.

Now, let’s say ETH hits $1800 and rallies further. Once it reaches $1800, your single-sided ETH LP will then begin to be sold into USDC.

Given that you are providing liquidity on Uniswap, you’ll also be able to earn swap fees while this is occurring.

However, suppose that $ETH tops out at $1700. In this case, because your position is out of range, your LP would remain entirely in ETH and none of it would be sold into USDC.

🧰 Strategy Execution:

This strategy can be executed using the following steps:

  1. Select a price range to enter/exit your current position
  2. Deposit the asset you wish to swap out of
  3. Withdraw your funds if you have fully swapped out of your position
  4. If you have not fully exited your position, adjust your range accordingly

⚠️ Risks:

There are a variety of risks associated with single sided LPing including:

  • Smart contract risk
  • Impermanent loss risk
  • MEV and market-risk from having intentions publicly viewable on-chain

6. Stablecoin Hedging

  • Difficulty: Easy
  • Risk Rating: High
  • Potential Opportunities: Y2K Finance

⛰️ Strategy Overview:

Stablecoin hedging is a way to both protect your portfolio while generating counter-cyclical returns by acting as insurance during periods of market volatility.

Stablecoin hedging can be done through catastrophe bond protocols like Y2K Finance, where LPs can underwrite de-peg risk in what’s known as the “Risk Pool” to earn premiums from counterparties who take the other side of the trade to hedge their own stablecoin exposure or speculate on a single one’s demise in the “Hedge Pool.”

For a full breakdown on Y2K, check out our previous tactic here.

While hedge pool depositors will lose their premiums to the Risk Pool during periods of stability, the payout can be immense in the event of a de-peg, as the Hedge Pool will earn all deposits into the Risk Pool. This could help potentially offset a portion of losses from other assets in a traders portfolio or the loss in the value of their “cash” position.

🧰 Strategy Execution:

  1. Deposit stablecoins into the Hedge Pool
  2. Stake your Hedge Pool LP token to earn farming rewards
  3. Collect Risk Pool deposits in the event that a stablecoin de-peg occurs

⚠️ Risks:

  • Hedge Pool premiums risk, as users will lose their deposit if a de-peg does not occur
  • Smart Contract risk

7. Leveraged Lending

  • Difficulty: Easy
  • Risk Rating: Medium
  • Potential Opportunities: Gearbox Finance, Sturdy Finance

⛰️ Strategy Overview:

Leveraged lending is similar to leveraged staking but with a few distinct differences.

While both involve a recursive borrow/lending strategy, the primary differentiator between the two is their means of earning yield.

Leveraged staking is focused on capturing a staking yield, but leveraged lending is focused on earning yield from interest payments.

This strategy is particularly lucrative on protocols running active liquidity mining incentives, as these token rewards can both increase lending returns as well as offsetting costs, or even making it profitable, to borrow.

While these incentive-based yields are far more volatile and less predictable than those that can be earned from staking, they can be highly lucrative over short periods of time, particularly for savvy degens who can enter pools early and quickly.

This game plan can be executed by hand in smaller markets and automated in larger ones like Aave and Compound via protocols like Gearbox.

🧰 Strategy Execution:

Here’s how a leveraged lending strategy works behind the curtain:

  1. Deposit ETH or another asset into a money market with active liquidity mining programs
  2. Borrow the same asset
  3. Repeat Step 1 & 2

⚠️ Risks:

There are a variety of risks with leveraged staking including:

  • Liquidation risk
  • Interest rate and incentive token price risk, which can compress yields
  • Money market bad debt risk
  • Smart contract risk for both the money market and from any automated strategy provider

8. ETH/BTC Pair Trading

  • Difficulty: Easy
  • Risk: Medium

⛰️ Strategy Overview:

Pair trading is a way to bet on the price of one asset rising or falling relative to one another without necessarily expressing an overall view on the market itself.

A pair trade can be put on with any duo of assets, but in crypto is most commonly done to bet on everyone’s favorite ratio: ETH/BTC.

With this strategy, a trader is either betting on the price of ETH increasing or decreasing relative to BTC, and vice versa.

This can be implemented on centralized exchanges that accept non-stablecoin collateral, as well as in DeFi through money markets.

🧰 Strategy Execution:

A long ETH/BTC strategy can be executed as follows:

  1. Deposit ETH as collateral into a money market or CEX
  2. Open a short BTC perps position, or borrow BTC on a money market
  3. Close the position (net of interest or funding) when you want to exit the trade

⚠️ Risks:

Pair trades have a plethora of different risks including:

  • Liquidation risk
  • Interest or funding rate risk
  • Smart contract risk if using DeFi
  • Custodial risk if using a CEX

Action steps

  • 🛠️ Test out the above trading strategies for yourself!
  • 🏴 Check out hot opportunities in the Token Hub

Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.

Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here.

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