Decentralized finance, or what we call DeFi, has been getting a lot of attention from investors as the global adoption of cryptocurrencies continues to accelerate.
But what is DeFi and why do we hear so much about it these days?
DeFi is a collective term for financial products and services accessible to anyone with an internet connection. The goal of DeFi is to eliminate the third parties that are involved in all financial transactions and to create an entirely new financial system, completely independent of the traditional financial economy.
In the last year, DeFi has really taken off, with the total value locked – the overall value of assets deposited in transactions – having risen from $700 million in December 2019 to over $200 billion at the beginning of 2022, equivalent to Greece’s 2017 GDP. This is why you have likely heard about DeFi in the last year, it has become a major industry, and it happened fast.
Now, if you would like to invest in DeFi, below are some tips I have come up with that I have acquired as a DeFi asset manager. Let’s dig in.
Invest in cryptos with large market capitalization
There are over 13,000 different cryptocurrencies according to CoinGecko. The majority of these projects will likely not work out. View lower market capitalization tokens as risky start ups – they come and go sometimes overnight.
But if you want to be safe, invest in cryptocurrencies with larger caps, such as bitcoin, which continues to hold the largest market cap. Cryptos with large market capitalizations have mostly been around for a while now and have lasted the test of time.
Decentralized finance: Utility is crucial
There is a slew of crypto projects that are working on promising ventures that could potentially upend the fintech world. So when I am evaluating the value of a crypto project, I look at its utility. In other words, I ask myself, “What real-world problem is this project solving?”
Bitcoin’s utility is clear – it is meant to be truly decentralized digital money. It doesn’t have a foundation, a company, and not one person is in control of the protocol. Although its utility is evident, bitcoin’s utility is now becoming more as a reserve currency of the internet, and possibly, one day, even the world.
Ethereum is one of the best cryptocurrencies in terms of utility due to the booming NFT market. Although NFTs played a part in the network’s meteoric surge, its support for DeFi likely contributed to its rally, too. You can easily buy Bitcoin and Ether on all major cryptocurrency exchanges.
It’s important to understand the utility behind projects, but it’s true that many of them don’t have any real utility. A recent report said that over half of the top 100 cryptocurrencies by market capitalization do not have any utility, so do your research before investing in tokens outside of the top few.
Earn high interest with your crypto
The beauty of crypto is that not only can you enjoy the appreciation that will come from holding onto it, but you can also earn high yields from them in a safe, secure and easy way.
How do you do this? In most major cryptocurrency exchanges, like Block-Fi, Cabital and Coinbase, when you purchase cryptocurrency with your fiat currency, you can then deposit it into their savings platform where you can then sit back and earn high interest.
Staking offers crypto holders a way of putting their digital assets to work and earning passive income without needing to sell them. You can think of staking as the crypto equivalent of putting money in a high-yield savings account.
Ethereum (ETH) has become one of the most popular cryptocurrencies on the market – although it is not exactly a cryptocurrency itself. Staking ETH on your own will require a minimum of 32 ETH. Rewards vary, but it’s expected that the rate of return on ETH staking is 5-17% per year.
Decentralized finance and stablecoins
When it comes to stablecoin staking, both USDT and USDC are considered as the most suitable options. One of the major benefits of staking these stable coins is the interest rate, as you can get up to 12% APY, which allows you to beat inflation and make a profit at the same time.
In addition, staking with USDT and USDC is safe too. As the names suggest, these stablecoins are pegged to the US dollar, rendering them less volatile than typical cryptocurrencies. If you’re looking for a safer way to stake crypto, stablecoins are the way to go.
High-interest rates on stablecoins lets you invest in worldwide opportunities that are usually open to hedge funds. This finally gives the retail investor a chance of a lifetime – to invest in projects that were at once only open for hedge funds and high net worth individuals.
Cryptocurrency is only going to grow this year so the opportunities in the DeFi space seem almost endless. To participate in this new digital revolution, I would pick up some Bitcoin, Ether, and some stable coins and stake them into your cryptocurrency savings platform of choice and earn high yield passively.
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