Where is the safest place to park your money in crypto?
You better make sure you're right on this one.
The point of crypto is to make a profit and not lose it. However, the odds are against you.
A large part of crypto is about taking your money, legally.
In what follows, I give you a breakdown on how to protect yourself in a smart way. Scroll down.
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The first layer of protection: Network Security
Whatever you do in crypto, remember to park your most important crypto assets on the right network. This is a fundamental principle. Get this wrong and you may lose everything.
There are only two networks that are safe to park your money:
Bitcoin
Ethereum
Bitcoin and Ethereum are the most decentralized and secure networks in crypto. All other networks are a joke by comparison and have huge risks. For example, most Layer-2 networks on top of Ethereum have 3 to 9 wallets that control that Layer-2. If they turn malicious, they can literally steal everything.
Yes, you read that right. Three people in crypto can agree to rug a whole network. Solana is somewhat better, but it’s extremely centralized as well. You make profits on Solana and then you move them out of Solana. That’s how you protect them.
Here’s a short guide on how you should manage this:
Bitcoin network - use it for long-term protection of your wealth. Park your money in Bitcoin on its native chain using a hardware wallet. You do this assuming you do not plan to touch those coins for a minimum of 2 years or more.
Ethereum network - use it to park your money in the short to medium-term, generally under two years. Park here stablecoins like USDC/USDT or gold tokens like PAXG using a hardware wallet. You later deploy them to buy more Bitcoin during bear markets. Repeat every 2-4 years.
The second layer of protection: Protocols Age
Never park your money into crypto protocols or DeFi that didn’t exists for more than one bear market (ideally two). A bear market usually happens every four years and lasts about two years.
That means the safest protocols should be at least 4 to 8 years old!
If they are not older than 4 years, do not park your money there. It’s too risky, even if they are on the Ethereum network. That’s because they are untested under market stress like in a bear market and most protocols fail at that time.
With Bitcoin on its native network, you have nothing to worry about since there is no DeFi or protocols there. However, with other networks, you have plenty of risks based on the protocol you choose.
Let’s assume you have some USDC and you want to park it in DeFi to farm yields. Here’s a list of protocols from the safest to the riskiest:
AAVE, created 8 years ago or in 2017
Uniswap, created 7 years ago or in 2018
CurveFi, created 5 years ago or in 2020
GMX, created 4 years ago or in 2021
Hyperliquid, created 3 years ago or in 2022
Ethena, created 2 years ago or in 2023
Anything after GMX is untested in my opinion and you should definitely not park your money there long term.
Protocols like Hyperliquid and Ethena are new and very promising, but they are too young to park your money there. Use them to farm yields in short to medium intervals during a bull market (also see Alpha Post #52), but make sure you exit such protocols when the market turns bearish just to be safe.
For example, Ethena’s USDe will likely lose its peg to the dollar as soon as the next bear market starts since they will no longer be able to generate sufficient return on their delta neutral strategy as the market will be dominated by sellers.
3. The third layer of protection: Stablecoins Reputation
Most stablecoins end up as scams or turn into a ponzi soon after they are created. They are also one of the favorite ways scammers create artificial demand and liquidity for their protocols that end up imploding. Basically, such “stablecoins” count $1 in real liquidity as $10 via leverage.
A good example of that was UST or the “stablecoin” of Terra Luna that erased almost $20 billion in market capitalization when it imploded during last cycle. Another recent example was Kujira’s USK stablecoin which was abused and turned their protocol insolvent.
Therefore, only use reputable stablecoins:
USDT, created in 2014, centralized
DAI, created in 2017, decentralized
USDC, created in 2018, centralized
In practical terms, USDT is the most liquid for trading on centralized exchanges. On the other hand, USDC is the most liquid across DeFi and has the best compliance with regulators. DAI is perfect if you want to hold a decentralized stablecoin which nobody can freeze in your wallet.
Any stablecoins apart from the above means you take additional risks. Definitely avoid any stablecoin that is not at least 4-8 years old. Here, Ethena’s USDe qualifies as a highly risky stablecoin, even if it reached $6 billion market cap (most of it due to leverage).
BONUS Tips
If you have more than $1,000 in crypto, using a hardware wallet is a must.
Never give up custody of your assets for a promise of unrealistic returns, it’s likely a scam as soon as you click send. There is no free lunch.
Crypto is a casino and the casino’s purpose is to take your money. Smart investors leave the casino when their pockets are full of cash.
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