Disaster-Proofing Your Crypto Portfolio

Crypto is risky, and abrupt market downturns make this abundantly clear.

Many tokens demonstrated this feature earlier this week when a host of assets found their valuations halved after a week’s worth of negative price action was compounded by a particularly brutal Sunday selloff. Despite managing to pare back losses on Tuesday, practically every token remains substantially underwater compared to June highs.

While DeFi protocols managed their risk as expected during this drawdown, the crypto industry has historically found itself dealing with bad debt and asset depegs during the most volatile market events.

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Assuming a bear market has truly kicked off, then, sure, the optimal day to de-risk your crypto exposure would have been last Monday, but fortunately, in the present absence of disaster, it's not too late to take proactive measures to safeguard your portfolio against any perceived future harm.

Today, I'm walking you through steps to future-proof your portfolio against losses from a cataclysmic drawdown 👇

🙅‍♂️ What to Avoid

During 2024, crypto users honed in on airdrop opportunities to enhance their returns with token allocations for using onchain applications. Pegged assets, like liquid restaking tokens and Ethena’s synthetic dollar, captured outsized attention from airdrop hunters, yet these rank among the worst possible assets to hold.

Although many believe these tokens will hold their intended value following their months-long track record of stability, underlying liquidity is extremely thin for these assets and could evaporate instantaneously during the next downturn, leaving holders unable to cash out at prices they believed they could obtain.

Further, these pegged asset concepts have received widespread integration throughout DeFi protocols and are used to finance billions of dollars in lending activity. The risks that their perceived stability could suddenly unwind threatens to leave lenders and liquidity providers stuck holding the bag, paid out in depegged assets with questionable recovery rates in the case of USDe and an unclear timeline for at-par LRT conversions.

👀 What to Seek Out

For investors who see no pathway for crypto prices to trade materially higher from here, there is no better play than increasing your cash allocation.

Crypto contagion will blow holes in the balance sheets of many industry participants, meaning the best cash-like assets to hold are ones that are fully regulated and reserved.

Tether may publish quarterly balance sheet attestations, but USDT remains an unadvisable stablecoin to hold, as it is only 89% collateralized by cash-like assets, with the remainder reserved by the gold, Bitcoin, and “secured” margin loans. 

Even though regulated stablecoins can suffer depegs, as witnessed during the 2023 banking crisis when USDC holders panicked about Circle’s Silicon Valley Bank exposure, non-Tether stables like USDC, USDP, PYUSD, and USDM remain vastly superior to the leading opaque alternative as a result of their balance sheet quality.

USDM holders automatically receive daily onchain interest payments through token rebases allowed by its Bermuda regulators, and USDC holders can earn yield by holding their balances on Coinbase, albeit by adding marginal off-chain counterparty risk with a reputable and regulated centralized exchange.

While lending is undesirable due to the possibility of bad debt accrual, users seeking additional onchain yield for their stablecoin assets can earn boosted returns by providing liquidity on regulated stable pairs – like USDC-PYUSD – with minimal risk of impermanent loss that would result from holding a depegged asset.

Money market funds from the burgeoning tokenized asset sector like BlackRock’s BUIDL and Franklin Templeton’s FOXBB remain viable alternatives for those seeking to batten down the hatches while earning automatic onchain yield, yet these instruments are unlikely to be the best fit for many investors due to their accreditation requirements and limited DeFi integrations.

📉 Bad Times Ahead?

For those shaken by the selloff who find themselves uncomfortable with their current level of portfolio risk, now is the time to change up asset allocations, as there may not be a better opportunity to do so in the future.

As global economic malaise sets in and interest rates tumble, the yields that can be earned from holding interest-bearing stablecoins or providing onchain liquidity will almost certainly compress, reducing the profitability of your portfolio over the longer term.

With this reality in mind, for crypto degens content with hefty risk allocations who are simply uncomfortable holding crypto-specific risk, investing in long-duration Treasuries at elevated yields could be the ultimate play to score a significant multiple if the globe is swallowed whole by recession.

Sadly, long-duration US Treasuries are not available onchain, restricting this strategy to TradFi rails; exposure to this subsector of the market can only be gained by directly acquiring the underlying (via your broker, investment advisor, or Treasury Direct) or through purchasing a long-term bond ETF, like BlackRock’s iShares 20+ Year Treasury Bond ETF (TLT).