Much like the rotating seasons of summer, spring, autumn, and winter, bear markets are a recurring aspect of life that cannot be avoided. Bear markets are difficult to predict exactly. We never know when they will come, how long they will last, or how deep they will go. This may seem like a reason to panic. However, bear markets are also filled with opportunities and there are new innovations to help us take advantage of them. Take dual currency services for example.
Dual currency services allow investors to speculate on the price movement between a pair of assets earning above-average yield in the process. It is a common wealth generation strategy in forex trading markets and now, it’s fully available to crypto enthusiasts in a variety of formats.
What is a dual currency service?
A dual currency service - also known as a dual currency deposit - is a financial service or instrument that helps investors exploit the price difference between two currencies for financial gain. Simply put, the investor first deposits one currency and then withdraws the money in a different currency - if it is financially advantageous to do so.
In traditional finance, the dual currency service combines a cash deposit with a foreign exchange option. Due to the currency risk, the dual currency service offers higher interest rates than traditional savings accounts.
How does a dual currency service work in traditional finance?
As the name suggests, a dual currency service involves currency pairs. In traditional finance, this pair consists of two large, liquid currencies (e.g. the US dollar and the euro). In the pair, the value of the two currencies is compared against one another. The service examines how much it costs to buy one unit of the base currency in the pair. Then, currency pairs are traded in the forex market.
Investors then make speculated price bets with the chance to earn high-interest rates. The main risk for the investor is that the investment might be converted to a different currency if the other party chooses to use their option. But if the currency is one the initial investor does not mind getting back in return, then the risk is minimal.
Let’s say an investor lives in Spain but knows the interest rate is better in the USA. They then think about investing money in the USA where they can get better earnings than Spain. However, the investor also believes the interest rate in the USA may change against them over the term of the deposit. Hence, the investor wants to hedge against that risk with a dual currency option.
Therefore, at the end of the investment term, the other party will pay the investor in his home currency of euros. However, if the investor was wrong, and the exchange rate moves in the opposite direction that they thought, then it would have been more profitable to remain in USD currency and exchange the funds for euro after the end of the investment term.
Therein lies the risk. The investor still gets back the same amount of investment but the amount earned depends on the outcome of the speculative bet. Hence, the investor could receive less than they originally hoped for.
Dual currency services in cryptocurrency
This year, the cryptocurrency market has seen several platforms release their version of a dual currency service. The latest of which comes from the European FinTech platform YouHodler. “Dual Assets” as the feature is called, is a type of non-principal protected yield generation product.
Just like traditional dual currency services, YouHodler’s involves two different currencies - a cryptocurrency and a stablecoin. The investor gets to choose the underlying currency and the deposit currency in addition to the investment amount and the length of the position (from 12 hours to 2 days).
How much the investor earns and in what currency depends on the outcome of their speculative guess. If the settlement price finishes above the predicted target price, the investor gets back a return in the alternate currency (not the deposit currency). If the settlement price finishes below the predicted target price, the investor gets back a return in the deposit currency.
While the latter means the investor receives a currency that is currently falling in value, it also means they are getting a currency at a lower price. Hence, when the price of that currency rises in value late from the volatile crypto market, they could find themselves in a profitable position.
Using dual currency service during a bear market
Due to its comparatively lower risk infrastructure - compared to other crypto trading services - dual currency services are a creative way to generate yield during the bear market.
YouHodler CEO Ilya Volkov mentions that “HODLing isn’t the only strategy during bear markets. Bear markets are volatile and volatility means opportunity. Our “Dual Assets” product allows investors to manage risk more effectively while generating significantly higher yield than traditional holding techniques.”
In a world where staking crypto on DeFi platforms is increasingly risky and not user-friendly, dual currency services like YouHodler offer a new way to generate yield in bear and bull markets. One that is easy to use for all backgrounds and comes with the safety or reputable centralized platforms.