Strategy 5: Yield Farm Profitably in a Bear Market
During a market downturn, when you use most DeFi protocols, you’re bound to notice one painful fact — you are losing money.
The state of DeFi is such that 95% of protocols offer products and strategies that are long-only, meaning your LP or single-asset positions are exposed to the market in a way that as markets go up, your positions also go up in USD-value. The problem, of course, is that you are just as exposed when markets drop, and this is the kind of change that will turn your smile upside down as fast as it flips your portfolio from green to red.
Consider one of your LP positions at a top DEX like Uniswap, PancakeSwap, or Sushi. Both tokens in the LP pair have long exposure. The same is true for collateral inside lending protocols like Venus, Aave, and others. When prices are pumping, life is good. But when prices are dropping, or worse — we enter a dreaded bear market — you’ll be in for a long and bumpy ride, and that rollercoaster is much faster and scarier on the way down. Try not to throw up.
During such a market downturn, it won’t take long for you to notice that your farming yields no longer come close to offsetting the up to double-digit losses you’re taking every week. Trying to turn a profit will be like throwing water into the volcano that’s burning up your savings. So what can you do?
In the case of most DeFi protocols, unfortunately, not much. They don’t have the products in place to offset that. In fact, this is an inherent problem within the current DeFI ecosystem — a lack of sustainability in downward market conditions.
So what then, should you stop yield farming? Then you’ll just have to sit on stablecoins or crypto assets, hoarding them in a cold wallet as they sit around and eat inflation, not earning you anything, and even losing value. This was what most crypto holders did pre-2018. And no one likes to move backwards.
Such a forfeit would be saying goodbye to those juicy DeFi yields you’ve been earning, the high APYs that gave you the opportunity to look down your nose at your tradFi and non-crypto friends, sneering inside as they bragged about 3% high-yield CDs that can’t even keep pace with inflation. So ask yourself, are you ready for your portfolio to join the financial unemployment line?
Luckily for you, there’s a place where you can keep your cushy, yield-farming passive income flowing in, even in a bear market, and that’s at Alpaca Finance.
Alpaca is different, and I’m not just referring to their obviously genetic superiority to llamas, whether going by wool color or any other metric. I’m referring to the products Alpaca Finance offers you, products that if you know how to use them properly — allow you to yield farm profitably in all market conditions. For this article specifically, let’s consider how to yield farm profitably in a bear market.
While yield farming at Alpaca, you are not forced to hold long positions which are unprofitable in downtrending markets. You can yield farm at DEXs like PancakeSwap while customizing your position exposure: choosing between long, short or neutral. In this article and others, we’ve already introduced the concept of being long, where your profits move in the same direction as asset prices. Well, short is the inverse of that. While short, you earn profits while a token price drops, and that’s the core of how to build profitable strategies in a bear market. (You can read more about shorting here.)
Now that we’ve introduced the basics, we’ll go over the bear-market yield farming strategy in detail below, and If you really want to dive into the specifics, we highly recommend you read Strategy 4 first, where we give an introduction to leveraged yield farming and how to calculate your initial net long and short exposures.

How to Create a Yield Farming Short Position

During bear markets, almost all assets will drop in price. However, we can abstract this strategy to focusing on a specific token you believe will drop in price. That way, this can actually be used in any market conditions. For example, even in a bull market, if you believe a token like ETH will fall, you can short ETH on Alpaca Finance by opening a leveraged yield farming position while borrowing ETH. (We just use ETH an example here. Don’t hunt us, ETH maxis 😢)
Example: Open an ETH-stablecoin farming position, borrow ETH, use >2x leverage
You can open an ETH-USDT position, deposit $10,000 worth of tokens (preferably USDT to reduce swap costs), and borrow $20,000 worth of ETH (3x leverage). Because LP positions need to be split 50:50 between the two assets, after opening the position, Alpaca will automatically swap $5000 worth of ETH into USDT, resulting in $15,000 worth of ETH + $15,000 worth of USDT. Your exposure will be:
  • Long $15,000 worth of ETH
  • Long $15,000 worth of USDT
  • Short $20,000 worth of ETH ⇐ borrowed tokens
In aggregate, your initial net exposure is short $5000 worth of ETH (refer to Strategy 4 for more details on these calculations). As for USDT, because stablecoins typically stay pegged close to $1, long/short exposure on them is effectively neutral, and can thus be ignored.
With this ETH-USDT position, you’ll now be earning yield farming rewards at 3x the standard rate(less borrowing interest) while also profiting as ETH falls. Most importantly, you won’t be taking disastrous losses during a bear market, and will keep your yield farming operation going year-round, like a true veteran yield farmer.
A couple pro notes:
When you use >2x leverage, you will have a slight short exposure on the borrowed asset.
Compared to long positions, short positions have less exposure. With 3x, a short position typically has 1/3 the exposure of a corresponding long position. For the purpose of yield farming, this means your chance of getting liquidated will be much lower when short, when compared to a long position of the same size. If you needed to rebalance your position by adding collateral, it would also be less often with a short position.

How much will you profit/lose when token prices move?

When one or both tokens in an LP position moves in price, the underlying DEX will rebalance your assets due to how AMMs function. Taking an ETH-USDT LP as an example, if the price of ETH rises, the position will contain less ETH and more USDT. This rebalancing mechanism leads to the below graph, which shows how your equity will change when the price of ETH (the Borrowed Asset) moves. (You don’t need to worry too much about how AMM rebalancing works, but if you like, you can read more about it in our Alpaca Academy article.)
In this example, the non-borrowed asset would be USDT, which should not change in price, so you can use the green line as a reference. In other cases, your non-borrowed asset might be BNB, BTCB or another volatile asset, for which the other lines are useful references because those assets can change in price.
Colored lines assume yield farming APR + trading fees APR at 1x leverage of 25%, borrowing interest APR of 15%, platform rewards APR of 10%, and a 90-day farming duration.
Several key observations from the above graph:
  • The dashed black line shows your equity if you simply HODLed stablecoins in your wallet.
  • If the Borrowed Asset’s price remains unchanged (e.g. if you borrowed stablecoins): a) Without considering yields, your equity follows the solid black line. As ETH falls, you will profit, because you have a short position on ETH. b) When considering 3x farming yields (green line), your equity will be even higher.
  • If the Non-borrowed Asset’s price changes (e.g. if you opened an ETH-BNB position, as in the second example above), the curves will shift.
  • This is for a 90-day position, so the longer you hold a position, the more you will earn from yield farming and the higher that curve can go above the dashed black HODL line.
You can play with all calculations and graphs, including how far assets must drop to risk liquidation, on our Yield Farming Calculator.

Liquidation Risk

Though liquidation is less of a risk for short positions than long positions, it’s still something to be mindful of, particularly when using a Non-Borrowed Asset that is not a stablecoin.
At 3x leverage, the Non-Borrowed Asset relative to the Borrowed Asset (BUSD/ETH or BNB/ETH) will have to drop 36% before you risk liquidation (assuming a Liquidation Threshold of 83.3%).
If you do choose to open a position without borrowing a stablecoin, and borrow a volatile asset such as in a pair like BNB-ETH, when using > 2x leverage, be particularly careful if the Non-Borrowed Asset falls while the Borrowed Asset rises, as this can accelerate the position towards liquidation. Learn more about liquidations in our Alpaca Academy Lesson 3.
In summary, when you open a farming position using > 2x leverage, you are shorting the borrowed token. This is one of the only ways to yield farm profitably in a bear market.
In general, we suggest using a stablecoin as the Non-Borrowed Asset, and borrowing the crypto asset you believe will likely drop the most(whether that’s BNB, ETH, or BTCB).
That’s all for today. The final thing we’ll say is that although we all hate bear markets, veteran investors don’t care about the market direction because they know how to be profitable in both bull and bear markets. Meanwhile, amateur investors sit out bear markets, or even worse — take losses during them.
While this article won’t give you a finance degree, it will teach you how to use Alpaca’s platform well enough such that you’ll be able to profit in all market conditions with a few clicks of your mouse. At that time, while others are chirping on crypto twitter about the market state, you’ll be thinking to yourself, “Bull? Bear? Screw all that noise. I’m an alpaca…and that means whether grass fields or DeFi yields, I’m always in the green.”
For more articles on how to profit with Alpaca Finance, you can read our Six Simple Strategies to Maximize Your Farming Yields With Alpaca Finance, and be sure to also check our Alpaca Academy for even more educational content.
Last modified 19h ago