Crypto Recession Strategy: Staking Litecoin (LTC-USD)

in a previous non-crypto item, I explained my rationale for why I suspect a recession is likely just around the corner. One of the easiest reasons I can give is that the federal government book is now openly acknowledging a possible recession too. Many of the traditional metrics that investors have paid attention to in leading up to a recession show some warning signs. For the benefit of this specific article, I will not repeat the full thesis of my previous work. But the main points are the following:

• The 10s minus 2s are deeply inverted
• We had two negative real GDP printing quarters in 2022
• Inflation-adjusted retail sales peaked two years ago
• Consumer sentiment is horrible

In my opinion, these factors taken together could certainly justify moving the portfolios to a higher level. risk aversion strategy. For cryptocurrency investors, this is something to keep in mind as well. The problem for market participants in this industry is that we don't have a lot of historical context to guide us because most of these assets are less than 10 years old. Furthermore, the crypto response to the 2020 recession is unlikely to be repeated unless there is a large and immediate turn to easing by the central bank. While I won't go into the probability of that happening, I will say that there are things we can do within the crypto rails to defend ourselves.

The stablecoin problem

One of the simplest approaches crypto investors can take right now is allocation to stablecoins. There are several to choose from, but the vast majority of them still require a centralized custodian that has traditional bank rails for collateral. My personal preference is not to use those strategies due to counterparty risk. Especially in the face of a recession where financial institutions potentially have collateral that is under water.

In mid-March, we saw how exposure to traditional bank rails could lead to major issues in the crypto market when USDC (USDC-USD) briefly disassociated by more than 10%. One of the most popular decentralized stablecoins is Dai (USD-DAI) and even that coin was not immune to the bank scare because it is heavily USDC collateralized:

40% of the collateral backing of DAI is USDC. When the USDC peg broke, the DAI did too. while there are others decentralized stablecoins being developed on blockchains such as Cardano (USD-ADA) which are very interesting, most of these coins are still experimental and subject to pegging risks.

Litecoin is still strong

In October I wrote what I felt was a strong counter take in Litecoin (USD-LTC). Litecoin is a proof-of-work fork of Bitcoin (USD-BTC) that many in the crypto investment community choose to ignore. My opinion since October has been that omitting LTC from some mindless Bitcoin fanatics is silly and diversifying within cryptocurrencies makes sense.

Litecoin is not only up over 65% since that article was published, but it is also the only top 10 layer crypto that is outperforming BTC in the last 6 months. A lot of what I talked about in that October article still applies today. It remains one of the most widely distributed coins in crypto and one of the most widely used for payments. according to BitPay.

From a pure network valuation point of view, only ZCash (USD-ZEC) is cheaper from a 90-day adjusted NVT standpoint. The question for Litecoin bulls is how do you manage your holdings in a downturn if valuations in the broader market are high and you'd rather not switch back to fiat or other cryptocurrencies? You can adopt a share strategy to generate performance without relinquishing control of your keys.

How to bet Litecoin

Although Litecoin is a proof-of-work blockchain, it is possible to deposit LTC and return the return in kind. Historically, the most popular ways to do this have been through centralized entities like Celsius (USD-CEL) or Nexus (NEXUS-USD). However, there are obvious drawbacks with that approach and Celsius did not survive the crypto winter. Those depositors are still waiting for a portion of their funds to be returned to them. Relinquishing control to a centralized, non-transparent custodian is not what I'm suggesting.

THORchain (USD-RUNE) allows Litecoin holders to deposit LTC on-chain and earn in-kind return through THORFi's "savings vaults". These vaults differ slightly from THORChain LPs because asset deposits do not require RUNE exposure to qualify for rewards:

Savers Vaults is a fundamental innovation for THORChain and the first decentralized product to offer performance on native Bitcoin and many other native assets. Users anywhere in the world can move in and out of THORChain Savers Vaults at will and earn returns without the need for wrapping, risk of temporary loss, or price exposure to multiple assets.

The difference between betting guarantees through a proof-of-stake chain and doing it through THORChain is that PoS staking generally generates returns from token issuances, while THORFi savers are more similar to LP for THORChain exchanges. Essentially, the performance comes from the fees that users pay when they exchange between chains. This results in an APR that fluctuates, but the yields can often be higher than US Treasury bills.

Asset	Depth of savers	full savings	APR savings
BTC	$20.35 million	100.68%	3.41%
LTC	$741.95K	54.45%	5.22%
DOGE	$224.61K	22.64%	7.46%
BCH	$203.95K	33.65%	4.30%

Click to enlarge

Source: THORChain Explorer, PoW Coins

For Litecoin specifically, the coin's annual inflation rate is currently 3.7%, which means that THORFi's saver pool currently generates a 1.5% real return on the native asset if demand for the coin it stays constant. This also does not take into account the halving. There has been a lot of talk about the Bitcoin halving, which is about a year away. Litecoin also has an impending block reward halving, but that halving is less than 100 days away.

After that event, LTC's annual inflation rate will drop to 1.8%. Assuming the APR of THORFi Savings Vaults remains in line with current levels, THORFi's actual staking yield of LTC will increase to 3.4% on the native asset.

Risks with THORFi

Of course, performance does not come without trade-offs and one of the main risks inherent in any on-chain DeFi application is the loss of funds through hot wallet phishing scams or a larger network hack. By providing liquidity through something like THORChain, liquidity pools generate synthetic assets. What this means is that when a user deposits LTC into THORFi's savings vaults, what that user actually has is a claim on the deposited LTC rather than full control of the original asset. The THORFI savers program is also of a variable type. So as the depth of the pool increases, the reward associated with betting through that pool could decrease. Since savings vaults are paying redemption fees to liquidity providers, more liquidity chasing fewer fees could also lower performance.

crypto products

Lately, there has been no shortage of instances where the Securities and Exchange Commission has designated various cryptocurrencies as unregistered securities through enforcement actions. Despite Dash (DASH-USD) acting as a notable recent exception, the common thread that most SEC security designations share is that the coins had an ICO and are native to proof-of-stake chains. Litecoin never had an ICO. in a recent demand against Binance (USD-BNB), the CFTC claimed Bitcoin, Ethereum (ETH-USD), and Litecoin are all commodities.

While I think we're probably still a bit away from litigation and time before the US market gets more clarity on digital asset designations, it's hard for me to imagine the SEC trying to argue that LTC is a security. not registered, as it is a proof of work. currency with no centralized issuer and no initial coin offering. Should the courts determine that the vast majority of cryptocurrencies on the market are unregistered securities, LTC could position itself quite well as a digital commodity that is a cheaper alternative to Bitcoin.

Summary

This THORFi performance approach is not a strategy that everyone will want to do and it is not a strategy that everyone can do either. Savers' Vaults have depth levels and program fill targets. The Litecoin vault is only 54% full and has the second best performance of the THORFi PoW offerings. For a more defensively themed cryptocurrency wallet, finding safer yield opportunities without losing keys is an attractive option.

There aren't many individual assets or asset classes that will do well in a downturn. Cryptocurrencies are not likely to be an asset class that has many winners in a downturn, and that is, if any winners at all. However, Litecoin specifically has a halving in the very near future. It is a currency that has legitimate utility as a decentralized payment network. Long-term cryptocurrency holders who do not want to convert back to fiat, but want to be defensive, can use THORFi Savers to generate an in-kind return on LTC positions while they wait out a downturn.