In my recent log post about Aave I introduced the idea of borrowing for profit. In Play #1 I mapped out a safe and sure method to enhance interest earned. Today we take a look at how to leverage Aave (pun intended), to achieve various purposes by taking long or short positions. Should you try this too? No. As usual nothing in my blog posts are financial advice.
Rock's DeFi Play #3 -- Go Long using Aave
I am going to make this description short and sweet. If anything is unclear, please refer back to my previous post for details.
Step 0 is to deposit tokens into Aave that can serve as collateral for a loan.
Step 1 is to borrow USDC. Aim for a health factor of around 2.
(Why USDC? Because it tends to have the lowest borrow rate of the stable coins. In theory you could use any tradable coin but then you are also betting on the movement of that coin which could mess up your trading opportunity.)
Step 2 is to trade that USDC for the coin that you expect to go higher. At this point your long position is in place.
(The nice thing is that you can use this technique to go long on any token that is tradable on Quickswap or some other exchange on Matic.)
I like to trade 80% to 95% of my USDC for the long position so that if the trade starts to go against me I can get out of the position in a hurry. I often take a few quick small loses until I hit a trade just right and then really ride it. Of course your trading style may well dictate a completely different approach. The details of trading signals and so forth are beyond the scope of this article.
Step 3 is to unwind the trade hopefully by selling the tokens that you went long on for more USDC than you used to buy the position.
Step 4 is to repay the loan with USDC thus completing the operation.
To take a profit you not only have to cover the miniscule transaction fees and loan costs but also the sometimes not so miniscule fees to the liquidity providers on your trades. Accordingly this technique is not suitable for truly tiny trades, but I am sure that you can figure out how those details might affect your trading strategy.
Rock's DeFi Play #4 -- Go Short using Aave
Shorting crypto during a bull cycle is generally like playing with fire and not recommended however there are times where knowing how to go short can be used to protect your long term positions. Before we get to that, let's jump into the trade.
Step 0 is to deposit tokens into Aave that can serve as collateral for a loan. Also have some extra USDC in your wallet as well.
Step 1 is to borrow the token that you want to short. (This restricts you to shorting WBTC, WETH or MATIC.)
Step 2 is to trade the borrowed coins for USDC.
Now you see why I like to have some extra USDC on hand before I begin my short. Once again I give myself a buffer so that I can easily unwind the trade in case it starts to go against me.
Step 3 is to unwind the short position by trading from USDC back into the borrowed coin. Make sure to acquire enough coins to cover the borrowed amount plus the interest accrued during the time that your loan was active.
Step 4 is to repay the loan thus completing the operation.
Shorting is certainly dangerous as mentioned above however a common thing for me to do is to short for the same amount of BTC as I own in my interest bearing long account that I hold on a different network. In this case the short is being used to insure my existing position when viewed from the perspective of my overall portfolio. So shorting in this manner is really just a hedge to protect myself from potential harm due to a downswing. I am basically buying insurance for the cost of the roundtrip transactions and the trading liquidity fees.
Some Related Thoughts
Now I know that some of you are thinking that all of this work is a bit of a pain when I could just buy options instead. You are correct and I have indeed traded options on the Matic Network but that is a story for another day when a site that I know about finishes up their beta test phase and opens their doors to the general public. Besides that, options provide a lot of leverage and have other challenges while the techniques shown above provide minimum leverage which may be all that you want.
There is one more Aave-based play along the same lines that I have done that involves using borrowed funds to provide some or all of a liquidity providing position. We will get to that play sometime after introducing the basics of providing liquidity. Fortunately there is a new free game that simulates providing liquidity for fun and profit and I will introduce that to you in my next article which is coming right up.
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