22 November 2021

Market Opening: The risk profile of a coin holder

Patrick Heusser

Patrick Heusser

Head of Trading at Crypto Finance (Brokerage) AG

About the author

If you are a Bitcoin Maxi, it is hard to produce a return on your asset.

Of course, there are several levels involved in being a Bitcoin Maxi, but let us call them “risk averse levels” here, so as not to open up a huge debate. We need to focus on the actual topic of this market commentary: the risk profile of a coin holder.

The way I see it, there are a few things that need to be considered when assessing the risk profile of a coin holder. It is very similar to what banks do with their customers. Please find them below (in no particular order):

  • Not your keys, not your coins
  • Permissionless/trustless
  • Credit/counterparty risk
  • Bridges (wrapping, lockups, etc.)
  • Strategy complexity (collateral, margining, or cash management)

Depending on your risk appetite, the available investment spectrum will change. Coming back to my Bitcoin Maxi example (and the above list), I can search for matching investment strategies. E.g., if you do not want to lose control over your bitcoin private keys, there is (in my view) only one possibility to earn yield. You fund a lightning channel / run a lightning node. The yield will be in the very low percentage figures (or even below 1%).

Once the “not your keys, not your coins” hurdle has been removed more possibilities emerge. Depending on your risk appetite, you can earn between 2-8% on your bitcoins. If you are willing to use bridges, you can boost your return into the double-digit percentage area. E.g., the strategy below returns roughly 35%, but requires that you take some risks:

(Source: twitter thread)

It is easy to see that as soon as you cross a bridge into the Ethereum, Solana, Polkadot, or Avalanche ecosystem, your potential return explodes (and so does your risk). I have always been a fan of bridges because I have never believed in just one ecosystem, but rather in multichains. However, in order for users to be able to maximise their profits (or efficiency), the multichain universe needs solid bridges (I know this sounds easier said than done).

Here is an example from my own private portfolio: I switched various ERC20 tokens into ETH to lighten things up. I simply had too many tokens in too many different pools and farming strategies that I lost the overview. After cleaning things up, I was reminded of why I do not like to just hold ETH. It does not really yield very much. In all my investment decisions, I always go for tokens/projects where I can squeeze out some returns. Therefore, I was looking for a fairly straightforward strategy to give my ETH some yield without switching them back again into any kind of ERC20 token. The Terra Bridge  plus Nexusprotocol on the Terra network offered me a nice 8% yield on my ETH.

It is still a pretty adventurous strategy, and my palms are always a little bit sweaty after sending tokens into a bridge (or wormhole)… until I see them come out on the other side.

Happy bridging, and here’s to a successful week!

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