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Trading DeFi’s Governance Tokens May Be Tempting, But There’re Certain Risks

Unlike the traditional financial system where almost-zero interest rates are being offered to investors, the exuberant annual percentage yields (APY) offered by many DeFi projects are what brought investors to the yield farming valley.

Uniswap is inarguably the pioneer of decentralized exchanges (DEXs) as it caught investors’ attention with high returns for liquidity providers. The gold-rush then began, and there were many attempts to replicate Uniswap’s success, but the most notable one has to be the controversial SushiSwap. In order to attract more attention than its predecessor, SushiSwap offers higher than usual yields. Much to everyone’s surprise, it succeeded, at least for a moment.

These so-called decentralized exchanges are controlled by not a company, but by governance tokens where holders have the rights to vote to either change or set the direction of the project. With demands soared, many centralized exchanges began to list these governance tokens, and the speculation began.

The SushiSwap incident caught everyone’s attention as its anonymous founder dubbed Chef Nomi began to unload his ‘devshare’ of SUSHI tokens on the open market. When the news broke out, there was fear that this might be yet another ‘exit scam.’ Despite trying to explain on his personal twitter his true intentions and ensure the continuous work on the project, the token did not escape gruesome sell-offs in the aftermath. SUSHI token plunged from its high at around $12 to a mere $1.3 on exchanges, which is more than a 90% drop within a few days.

This exposes the risk of trading governance tokens on the secondary market such as centralized exchanges. Since many yield farmers received these tokens as rewards through providing liquidity on the protocols, their costs are substantially lower and they might be willing to sell the tokens they farmed at any price. Buyers in the secondary market are naturally met with higher costs as the only way to obtain these tokens is by buying them from the liquidity providers when they unload their stash on the open markets.

Bitcoin Technical Analysis

Bitcoin (BTC) is moving in a small trading range throughout the previous week as $9,900 has proven to be a reliable support. However, BTC does not have sufficient momentum to break above the $10,500 mark which has turned into a resistance level yet again.

Trading strategies for the sideways price action is to trade within the channel, catching bounces between support and resistance. If the price breaks down below the support at $9,900, make sure stop losses are in places. Experienced traders can attempt to ride the downside momentum by opening short positions.

Breaking above the $10,500 would indicate a new uptrend, follow buy the breakout and consider taking some profits at $12,500.

Ethereum Technical Analysis

Failing to reclaim $385 and standing above the daily EMA9, 25, and 50 shows a short term weakness of Ethereum (ETH). There are possibilities that the price will dip down to test $300 which is the bottom line (in green) of the uptrend channel.

Follow buy once ETH breaks above $385 and riding on the three EMAs should be a safe play. If the price decides to go lower, wait for the buy-on-dip opportunity when ETH bounces off $300 level. Breaking below the bottom line of the channel will flip the sentiment bearish, and can expect further sell-offs until the $250 level.

Disclaimer: This analysis is the view of the author’s alone, and does not in any way represent trading advice. all traders should trade at their own risk.

You may also want to read: Total Value Locked in DeFi Spikes $1.4 Billion as Prices Recover

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© Copyright of Novum Global Consultancy Pte Ltd {2020, 2021}. All rights reserved.

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