- Longtime DeFi trade is being applied to gold.
- Looping lets investors leverage precious metal.
- Gold is white hot amid market turmoil.
Looping has been a hot trade in DeFi for some time. Now investors are keen on applying the move in a new market — gold.
In a looping trade, an investor uses one asset to back a loan made with another asset. The stratagem is a way to leverage a position and multiply potential gains.
Investors are now utilising gold as collateral for loans denominated in USDC, according to Swarm, a Berlin-based crypto trading platform that specialises in tokenised real-world assets, or RWAs.
Then they can invest the dollar-backed stablecoin in whatever they wish, including more gold.
By looping gold, investors have bagged gains of almost 22% since January 8 even as Bitcoin has fallen 10%, said Swarm.
“There’s been a noticeable increase in looping,” said Katie Evans, the head of business development at Swarm.
“Especially where yield incentives are strong, but macro uncertainty and volatile rates make it a more complex play.”
‘When market conditions get volatile, this serves as an escape hatch.’
— Philipp Pieper, Swarm
Indeed, market turbulence has triggered a surge in gold as investors seek shelter from macroeconomic risks.
With the Trump administration undoing longstanding political alliances with Canada and Europe and implementing 25% tariffs on key trading partners, gold’s allure is brighter than ever.
Last week, the precious metal hit all-time highs north of $3,035 an ounce.
Gold meets crypto
The trade utilises classic methods for amplifying or leveraging a position in the marketplace with a crypto approach.
“When market conditions get volatile, this serves as an escape hatch,” Philipp Pieper, Swarm’s co-founder, told DL News.
“It’s fully collateralized leverage that’s much easier to understand than complex crypto derivatives.”
Looping has been a popular trade in DeFi for a while.
In 2024, a pair of Ethereum traders used looping to make $120 million and the idea rapidly grew into a robust cottage industry as numerous DeFi platforms offered ways to execute the move.
Fluid Protocol, for instance, supports $1.3 billion in lending and borrowing activity on its “multiply page.”
NFTs put to use
In looping gold and USDC, traders don’t buy a gold exchange-traded fund or a futures contract.
Instead they purchase an NFT representing ownership of the gold.
That may sound unusual given that NFTs are normally associated with Bored Apes or sports stars, and have become rather passé.
But their ability to record unique data onchain are quite handy for this trade, Pieper said.
And should the holder actually want to take delivery of the gold represented by the NFT, they can do so. The investors would then have to comply with know-your-customer and anti-money laundering checks.
Once the trader has the NFT they can borrow up to 70% of the value of the gold in USDC.
With the USDC loan secured, traders can then plough those funds back into more gold NFTs and borrow against those assets, thus completing the loop.
Risky business
As with any leveraged trade, looping poses considerable risks. Gold, after all, is a commodity that can make sudden reversals.
When investors grow confident the economy is growing and corporate earnings will rise, they tend to sell gold and pile into stocks, which can generate faster and richer returns.
On Friday, for instance, gold fell 1.3%. Last November, gold plunged more than 6% as investors brimmed with optimism about Trump’s victory.
Still, as long as investors are white-knuckling it through rollercoaster market, gold will probably remain attractive for some time.
“Uncertainty around the economic outlook has increased,” the Federal Reserve said on Wednesday as it revised its growth projections for the economy downward and increased its forecast for inflation.
Pedro Solimano is a markets correspondent based in Buenos Aires. Got a tip? Email him at psolimano@dlnews.com.