Conditions may dictate increased caution, defensive positions, and pool of the week
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Hello dear readers and intrepid pioneers,
This week we will be talking about market conditions, and how to prepare for possible volatility that could be looming on the horizon. Volatility means wilder price moves in the market in general, both traditional finance and cryptocurrencies, as the two are dependent on actions of the US Federal Reserve, central banks around the world, and the geopolitical landscape, for better or worse.
Also, check out the new Pool of the Week section.
The Federal Reserve
If you aren’t aware, the Federal Reserve in the US has a “mandate” from US congress to ensure maximal employment, stable prices, and moderate long-term interest rates. It is what is considered a “Central Bank” and is possibly the most influential and powerful financial institution in the world at present. Their mandates are very real.
When the global pandemic hit us out of nowhere, the Fed was there to stabilize markets by launching an emergency offensive to counter falling prices and instill confidence back to the markets. They are the “Backstop of Last Resort” as an entity in the limit. They have continued to stimulate markets by taking a series of policy actions and asset purchases in order to help mitigate the effects of high unemployment and instability caused by COVID-19. This was also helped by other Central Banks around the world, and the US Congress stimulus packages.
There are very sophisticated concepts they use but basically, the US government prints more dollars. This usually is done electronically, so they can add whatever amount is needed to inject into the economy. This of course, leads to inflation. The Dollar enjoys special status as the “World’s Reserve Currency”, and is viewed as a safe haven asset. Some foreign countries really like dollars, because compared to local currencies the inflation rate is vastly superior. So it enjoys good demand, which allows the government to print without too much consequence.
But now it seems the stimulus has run its course, it’s done its job. So well in fact, that inflation is rising at the fastest pace in decades, and continues to plateau for the time-being. The Fed has been vocal this year that they now need to fight inflation rather than unemployment, with employment levels rising steadily and now some argue a shortage of labor. But some view the Fed is seriously behind the curve, having left easy-money policies in place far too long. Even the Fed has said they need to act “expeditiously.”
For more on the Fed, see: https://www.investopedia.com/terms/f/federalreservebank.asp
According to traditional teachings in Technical Analysis, markets generally can withstand a few rate hikes before taking a stumble (“3 hikes and a fall”). Generally rate hikes, which are used to “tighten” or reduce inflation, are done in quarter-percentage increments, but the Fed has power to do more than a quarter-percent if they feel it is warranted. What the Fed has said recently is that they will likely do twice this amount (a half-point raise) at the next opportunity to raise rates, in May 2022. It is highly likely the Fed will raise rates more than once this year (they’ve already done it once).
Raising rates, as well as selling down assets (from their balance sheet) they had previously purchased, is going to introduce headwinds into the market. Meaning, the bull market will face some serious headwinds likely for the remainder of this year, and the resiliency of the economy in the face of rising rates, rising inflation, global instability and war, will be tested.
But it is never black-and-white, and certain sectors, stocks, cryptos, etc. can continue to produce profitable returns. Generally, however, the markets move like a school of fish. Stocks move together, especially sectors within the market (E.g. manufacturing, tech, etc.). There are always outliers but generally, due to law of averages, there is a collective action which the broader market takes.
In this type of environment, depending on your personal circumstances, tolerance and goals, defensive positions could potentially help mitigate this volatility. Be advised these are short to intermediate term strategies that require active management and could result in worse results than if you were to do nothing. For long-term, passive investors, continuing to Dollar Cost Average may prove to be wise in the end, and a drop in prices may even be welcome to get a lower cost-basis.
Here are some possible options, from more passive to more active:*
Build up a cash position, whether through savings from income or from selling down other assets, items, services, etc. A cash position can then be used to buy assets when they are falling, and the majority are selling.
Do nothing: Do not initiate new positions in outright holdings (I.e. Non-pooled tokens that you own in your wallet) or pools (abstain from locking funds).
Shift risk profile: Redistribute funds from more volatile tokens/pools to less volatile ones (E.g. Stablecoin pair pools)
Reduce overall risk exposure by converting some % assets to dollars or stable currency.
Convert some non-dollar assets to gold. Gold is a store of value that has been used for centuries. However, while gold may be less volatile than cryptos, it can still experience price swings.
Again, please consider your personal circumstances and do your own research. These are only some options that you may consider.
Pool of the Week
This week’s pool of the week is Pool #629 - ROWAN / OSMO.
Going forward we’ll look at the changing dynamics of pools on Osmosis, with success criteria being those that are currently offering stable or rising price action, and relatively high APR return.
Sifchain aims to be a cross-chain decentralized exchange (DEX). Similar to Osmosis but more like an Osmosis of Osmosis’ (plural), or a DEX of exchanges. It could offer functionality from its app where you have the option to participate in pools on Osmosis (Cosmos), pools on Terra (Luna), pools on Ethereum, etc. all from the same protocol. Here are some stats:
With a Market Cap / FDV of ~75% this is better than many in this space and will have less sell-pressure coming into the market (less inflation) all else being equal. The token, ROWAN, is used for governance and has use cases, see: https://sifchain.network/
The token is more than 50% in 6 months, meaning it could be due for a relief rally after settling around ~10cents since late January 2022. Even if the token price remains flat, the pool is currently offering an APR of ~135% for a 14-day lockup, and liquidity trend is up. This could lead to a nice boost in the price, but remember pools can be fickle, and if the APRs drop too much, price will surely follow.
Please leave a comment if there is anything you’re interested in hearing about next week, or would like more info on something.