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Bear Market Strategy: Shorting While Farming With Alpaca Finance

Alpaca Finance allows users to short farming positions and make potential profits even during a market downturn.

Shorting on Alpaca Finance 

Alpaca Finance offers users numerous techniques to earn yields in the Decentralized Finance (Defi) space. The leveraged yield farming platform on BNB Chain enables users to create strategies to customize their assets' exposure and earn profit. Some of these strategies include “longing” and “shorting.”

Longing is a common method for traders, where profits are made by holding assets that rise in price over time. Users who utilize this strategy can also make losses if the assets drop in price.

Shorting, on the other hand, is the act of selling assets in advance to make a profit when the price drops. 

Shorting can be very lucrative on Alpaca, unlike most derivatives exchanges where users lose their funds when their short positions don’t yield profit each time the asset price doesn’t fall. 

The difference is: Alpaca allows users to farm and short the market at the same time.


With Alpaca Finance, users can short on borrowed assets. This can be done in just a few steps by depositing your desired amount into the specific farm and setting a leverage higher than 2x – meaning you borrow more than the amount of funds that you post as collateral. This action ensures that Alpaca Finance lends you enough funds to create a net short position and generate profit if the price of the borrowed asset drops. 

In summary, farming with a leverage greater than 2x automatically creates a short position on the borrowed asset, which can yield profit in the bear market as the price drops.

Brief Explanation of Shorting on Alpaca Finance 

Here is a brief representation of shorting while using leveraged yield farming on Alpaca Finance, with ETH-BNB LP pool. In this case you are betting that BNB will fall in price relative to ETH:

  • You add 1 BNB in principal to farm ETH-BNB on Alpaca Finance. 
  • You choose 3x leverage. Thus, you are borrowing 2 BNB. 
  • From the first two steps, you now have a total of 3 BNB in holdings. Alpaca Finance will convert 50% of your BNB acquisition to ETH to create a balanced ETH-BNB LP position. 
  • Hence, the protocol sells 1.5 BNB and converts it to ETH. You now have 1.5 BNB and 1.5 BNB worth of ETH, and your LP position is created at a 50:50 ratio. 
  • When you close your position, you are holding 1.5 BNB but you still owe Alpaca Finance 2 BNB. 
  • Alpaca Finance will take your 1.5 BNB and then account for the 0.5 BNB remainder by using your ETH balance to purchase 0.5 BNB. (In total, you paid Alpaca Finance 1.5 BNB plus an amount of ETH worth 0.5 BNB.) 
  • Now, if the BNB price had dropped compared to ETH after you converted your initial 1.5 BNB to ETH, that means to cover your debt you were able to buy back the 0.5 BNB at a lower price. In simple terms, you sold high, bought low, and have profited from the short.

In addition to the profit from the successful short, you have to factor in the cost of borrowing the funds from Alpaca (and other fees), but also the earnings made from LP farming (including interest and platform rewards). Currently, Annual Percentage Yield (APY) rates on Alpaca pools range from 1% for stablecoin pairs to more than 300%.

“Well, with Alpaca, when you borrow from us, not only are you not losing money from borrowing interest, you’re gaining yields! Why? Because you’re using the held asset for farming! Where the yields almost always far outweigh the borrowing interest!” according to Alpaca.

Making Profits From Shorting 

Now that you understand how shorting on Alpaca Finance’s leveraged farm works, how can you utilize the strategy to make profit? Here is a simulation of creating a short position with an asset-stablecoin farm, e.g ETH-USDT. 

You would create this short in the expectation that the price of your borrowed ETH will fall during a bear market.

At the same time, the non-borrowed asset, USDT, will be unaffected irrespective of the market condition. Here is how it works: 

  • Open an ETH-USDT farming position on Alpaca Finance and set leverage at 3x. 
  • Deposit your amount. For this illustration, we are going to use a $10,000 USDT deposit. Why USDT? To reduce swap fees. 
  • Since the leverage is set at 3x, you are borrowing $20,000 in ETH. 
  • Now, since Alpaca Finance will balance the pool at a 50:50 ratio, $5,000 from your ETH debt will be swapped to USDT. So you have $15,000 in ETH and $15,000 in USDT. 
  • You are long on both borrowed $15,000 in ETH and $15,000 in USDT. However, as it is a stablecoin there will be little or no price movements from the stablecoin.
  • The $5,000  swapped from ETH to USDT to balance the LP position will create a net short ETH position. 
  • When closing your farming position, you will have to repay the debt. If $5,000 worth of ETH drops to $4,000, you will buy back the debt at $4,000 instead of $5,000 and gain a profit of $1,000 before including additional profit from yield farming.

At this point, buying back at a lower rate means you are paying less than what you borrowed, and you have gained from the short.

While you can utilize a crypto-stablecoin farm, you can also use a crypto-crypto farm to short on Alpaca Finance. However, using a crypto-stablecoin farm is the safest in the case of a general bear market, as you do not risk significant loss from longing on your farmed stablecoin assets. 

You can read our project insight about Alpaca Finance to learn more about the leveraged yield farming platform on BNB Chain. 


Closing Thoughts 

Shorting on Alpaca Finance opens up new possibilities for earning. The strategy works by depositing and selecting leverage above 2x, allowing users to take an overcollateralized loan from the platform, which automatically balances the assets to create a 50:50 LP position, resulting in a net short position on the borrowed assets.

With this strategy, Alpaca allows users to short on borrowed assets in the form of LP, which can also produce net farming rewards. 

What is Alpaca Finance: 

Alpaca Finance is the largest lending protocol allowing leveraged yield farming on Binance Smart Chain. It helps lenders earn safe and stable yields and offers borrowers undercollateralized loans for leveraged yield farming positions, vastly multiplying their farming principles and resulting profits.

Where to Find Alpaca Finance:

Website | Twitter | Telegram | Discord | Medium | GitHub |

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