This series of articles on how to invest in cryptocurrencies with minimal risk and maximum profit comes in 3 parts. If you consider yourself an experienced user, you can learn how to protect your investment with the help of loans secured with cryptocurrencies, or how to double a profit while hodling bitcoins. If you are a newbie in the world of cryptocurrencies, we advise you to start with the Part 1.
How to mitigate risks when investing in cryptocurrencies?
It is the high volatility of cryptocurrencies that makes them such an attractive investment opportunity but is also responsible for an element of risk. Long term investments are those that cover periods longer than a year and are not suitable for investors who panic after short-term rate fluctuations. If the BTC exchange rate is decreasing, then you should wait for the minimum level, buy cryptocurrency, put it on a cold multisig-wallet and wait for price to increase.
However, if you are afraid to take a risk for the entire invested amount, you can insure yourself against losses by crypto-backed loans. Borrowing on Biterest, you immediately cash in bitcoins, but they continue to belong to you, being pledged on a multisig address. The cash amount will be less than the value of bitcoin collateral, but the difference in costs depends on what discount you apply to the value of the collateral.
You should set the size of the discount depending on the amount that you are willing to risk. The key feature of Biterest is the ability to set any value, from 1% to 99%. If you can risk with 15 percent of the invested amount, then you will receive a loan in the amount of 85% of the collateral value.
Let’s explain with an example: You bought $5000 of cryptocurrency and are prepared to “lose” no more than 15% or up to $800. Then you applied for a loan in the amount of 4,200 USD and the period of 90 days at 8% per annum. Given a discount of 15%, the required Bitcoin collateral will be the equivalent of $5,000 ($4,200 is equal to 85% of $5,000). Thanks to your new loan, you need not worry about future drawdowns of the rate, since the minimum allowable amount for which you have been ready to sell bitcoin is already in your hands.
Now consider on an optimistic scenario: During a 90 day period, the bitcoin rate can rapidly go up and grow several times, as was the case between March and July. Although you have already cashed $4,200, the pledged cryptocurrency still belongs to you throughout the entire loan period. The collateral value can increase significantly and by the end of the loan period it might be not 5,000 but as much as 8,000 USD. In order to get back the collateral increased in price, you need to return the received $4,200 and the $83 of accrued interest. The total profit from the growth in the value of the collateral would be $2,917. After receiving bitcoins, you can insure them again by lending.
You receive a loan secured with bitcoin on Biterest;
When the price of bitcoin goes up, the value of your collateral increases too;
Repay the loan and get your collateral back in full;
Your profit is the difference between the initial and final value of the collateral minus the interest on the loan.