3 Lessons from My DeFi Mistakes to Keep Your Portfolio on Track

Strata Trader -

I made the mistake of chasing high-yield APRs across various chains and protocols, which led to a fragmented portfolio.

In the second quarter of 2024, I found myself chasing liquidity pool yields across various EVM-compatible chains and even ventured into Solana. I was part of a group of DeFi enthusiasts who were generating astonishing APR returns by acting as market makers in DeFi liquidity pools, collecting trading fees alongside asset price appreciation. Seeing their success made me feel like I was missing out. However, they were providing liquidity in pools containing assets I wasn't confident about: meme coins, low-cap altcoins, and other speculative tokens. They even paired highly speculative assets with blue chips like BTC and ETH, which seemed risky to me.

From this experience, I learned that others' gains are relative to their beliefs and risk tolerance, and that I shouldn't blindly follow someone else's DeFi investments because our expectations and strategies differ.

Don't Chase High Yields - Chase Assets You Want to Hold

If you focus solely on chasing high yields, you may find yourself holding a fragmented portfolio of assets you don't want in the long term.
This lesson is crucial because chasing high yields can lead you to stray from your core investment strategy. You might end up swapping valuable "blue chip" assets for speculative tokens that offer high yields but lack long-term potential. This can erode your portfolio's value and stability. On the other hand, if you focus on acquiring assets you genuinely want to hold and set strategic minimum yield expectations, you'll align your investments with your risk tolerance and long-term goals, leading to a more cohesive and potentially more profitable portfolio.

Let me share some actionable steps to help you avoid the pitfalls I encountered.

1. Focus on High-Liquidity Protocols and Chains

This is important because protocols and chains with high liquidity offer better yields on asset pairs you actually want to hold, thanks to higher trading volumes and activity that generate more fees.

To put this into practice:

  • Research and identify chains and protocols where your preferred assets have the highest liquidity, such as Ethereum or Polygon.
  • Provide liquidity in pools that include assets you are confident holding for the long term, avoiding speculative tokens.
  • Regularly monitor the liquidity and yields to ensure they continue to meet your investment criteria and adjust your positions as necessary.

2. Develop an Exit Strategy and Stick to It

This is crucial because knowing how and when to exit an investment is more important than entering one. A well-defined exit strategy helps you capture expected returns and manage risks effectively. For example, I have three exit plans depending on investment performance: converting assets into fiat, ETH, or directly into BTC. Having predefined profit-taking levels keeps me disciplined and aligned with my investment goals.

To implement this:

  • Set clear profit targets and stop-loss levels for each of your investments to know exactly when to exit.
  • Determine your exit methods ahead of time, decide whether you'll convert gains into fiat, stablecoins, or other assets like BTC or ETH.
  • Regularly review your exit strategy, adjusting only when necessary due to significant market changes, but avoid making impulsive decisions based on short-term fluctuations.

3. Align Portfolio Decisions with Your Valuation Metrics

This is important because you need to assess how each decision impacts your portfolio according to your chosen valuation metric. For instance, if you value your portfolio in Satoshi value rather than fiat, your goal is to increase your holdings relative to BTC, not just in dollar terms. This ensures your investment decisions are aligned with your ultimate objectives.

To put this into action:

  • Select a primary valuation metric for your portfolio, whether it's in BTC, ETH, or fiat currency.
  • Analyze potential investments by assessing how they will impact your portfolio's value according to this metric before entering or exiting positions.
  • Consistently track your portfolio's performance based on your chosen metric to ensure you're progressing toward your goal, for me, that's increasing my BTC holdings over time.

Reflecting on my mistake of chasing high yields across multiple chains and protocols, I realized it led to a fragmented portfolio and a loss of focus on what truly mattered to me, making risk-adjusted returns to increase my portfolio's Satoshi value. Remember, when you chase too many opportunities, you divert your attention from your core strategy.

Losing sight of this can lead to poor risk management and potential losses. Stay focused on your goals, stick to your plan, and you'll navigate the DeFi landscape more successfully.

Strata Trader