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How does the core-satellite approach work in SwissBorg Earn?

With the recent launch of our second yielding strategy for USDC, you might have noticed that there are now different categories for strategies in the SwissBorg app. While USDC Smart Yield is a ‘core’ strategy, USDC Stargate is a ‘satellite’ strategy.

What do we mean by core and satellite strategies? And how will these categories be applied to future yielding strategies in the app? Keep reading to find out.

What is the core-satellite approach?

The core-satellite approach isn’t unique to SwissBorg Earn. In fact, it’s a common approach to asset allocation in the world of traditional investing.

Simply put, core assets are those that are lower risk and more passive when it comes to their management. In traditional investing, a good example is stock indices - indices track the performance of the market and lead to instant diversification because you are holding a range of securities rather than focusing on a handful of stocks.

Because your investments are simply following the market, and by investing in an index, you are investing in the top securities within that market, you don’t need to research individual stocks. Investors also treat indices differently - buying and holding them over time, rather than selling them as soon as they make a profit. This then means that indices require less active management - in many cases, investors will simply dollar cost average into an index each week or month, rather than actively trading.

Because this type of investment is more passive, it also tends to be lower cost. While actively trading individual assets results in execution fees being charged for every trade, buying and holding doesn’t have the same level of cost. Additionally, they tend to be more tax efficient, because you aren’t selling and therefore don’t need to pay tax on the profit each time you sell an asset.

Now this approach might sound boring to some people, but it holds up over time. According to a study released by JP Morgan, over the past 20 years, retail investors obtained an average return of 3.6% while the S&P 500 obtained an average return of 9.5%.

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20-year annualised returns by asset class (2002-2021)

Satellite assets, on the other hand, are those that are more actively managed. To continue with the traditional stock market example, here you might pick and choose the stocks that you think are going to pump in the next few months or years. Your goal is to outperform the market.

If you do this well, your satellite assets could lead to your portfolio increasing in value beyond the pace of the market, as an increase in these assets drives up the overall value of your portfolio. However, there is a higher risk that these assets will fall in value as well.

As mentioned earlier, they are also actively managed or traded. This then comes with higher costs from entering and exiting trades, as well as the tax costs associated with any capital gains.

Which approach is better?

You might be wondering, which approach is better? Trick question - the core-satellite approach doesn’t choose just one approach, but it combines the two, thereby allowing investors to experience the best of both worlds. 

By having a portion of your portfolio in core assets, the focus is on more stable returns, lower risks and lower costs. With the satellite assets, there is a higher cost and higher level of risk, but the potential for higher returns.

So what’s the best practice for combining these approaches?

As the name suggests, ‘core’ assets would form the core of your portfolio. The general rule of thumb suggests this should be significant - between 70% and 85%. Meanwhile, satellite assets would make up the remaining portion - between 15% and 30%.

With the bulk of your portfolio held in core assets, you can experience the gains of the markets while minimising your risks. The satellite assets then give you the opportunity to boost your profit, but holding a smaller portion of these assets means that if something goes wrong, it won’t hit your entire portfolio.

Think of your core assets as your foundation. If you were building a house, this would include the floors, walls, roof, windows, doors, etc. The satellite assets are bonuses - the voice-controlled entertainment system, under-floor heating, or roof-top jacuzzi. These are all nice to have, but without having your foundations in place, they don’t have much of a point.

How does this approach apply to crypto?

You might be thinking, this all sounds very well and good for traditional markets, but isn’t crypto different?

Yes, crypto is different - the volatility experienced in the crypto markets is much higher than that experienced in traditional markets, with both higher highs and lower lows. However, within the market itself, there are similar patterns. More established assets, like Bitcoin and Ethereum, tend to have lower levels of volatility than micro-cap tokens.

Meanwhile, stablecoins are designed to avoid this issue of volatility altogether by being pegged to traditional assets, with some examples including USDC, USDT, EURT and PAXG.

To apply the core-satellite approach to crypto, an investor might consider investing 80% of their portfolio in large-cap tokens and stablecoins, while investing the remaining 20% in micro-cap tokens.

So how does this apply to SwissBorg Earn?

The core-satellite approach and SwissBorg Earn

We have an exciting roadmap coming up for SwissBorg Earn, and many of your favourite yield-eligible tokens in the SwissBorg app will soon have multiple earning strategies.

This put us in an interesting position, where we wanted to give our users plenty of options to choose from, but we didn’t want to overwhelm less-experienced crypto investors with a long list of yielding strategies.

This is where the core-satellite approach came in. In SwissBorg Earn, we adopted this approach by making the lower-risk strategies the core earning strategies. This aligns with our values as a crypto wealth management provider, as we prioritise wealth protection over speculation.

Because of this, the original Smart Yield strategies are now all considered to be core strategies. When we add staking for different tokens in the app, these too will be core strategies.

However, we recognise that different investors have different preferences, and while many of our community members value a lower-risk approach, there are others who are more comfortable to take a higher risk with the potential for a higher reward.

For these users, we are rolling out satellite strategies for the different yield-eligible tokens in our app. Satellite strategies are more advanced and higher risk, and each satellite strategy will have the Cyborg mood adventurous or brave to indicate the level of risk (with adventurous being a mid-level of risk, and brave being the highest risk option). Furthermore, unlike in the traditional finance sense, our satellite strategies are not actively managed and involve no human intervention whatsoever. The satellite strategies are fully automated through smart contracts and the yield generated depends entirely on the underlying protocol chosen by the user. 

In addition to this, every satellite strategy is named after the protocol used to generate a yield. This is both for maximum transparency, and also so our users can do their own due diligence on the risks involved when investing in a certain protocol.

Ultimately, with the core-satellite approach, our goal is to give our users the tools they need to make informed investment decisions that are right for their investor profiles.

Ready to start earning crypto your way? Learn more about SwissBorg Earn !

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