The current global financial bear market has intimidated many investors new to finance, with scores of retail customers fleeing from investment funds and platforms as markets plummet. Those more familiar with markets, however, will recognize the current dip as simply a stage of the economic cycle.
Indeed, the current bear market could be one of the best times for sophisticated and pro-risk investors to diversify a small portion of their portfolios into alternative investments with high risk/reward profiles.
Many of these investors have been moving liquidity into a Fintech sector called decentralized finance (DeFi) by the billions of dollars. Since 2020, DeFi has grown from an industry with just a few hundred million dollars of assets under management to one with over $80 billion of AUM today.
DeFi’s growth has been driven by the rise of digital assets and application-based financial products built on Web3 networks like Ethereum. These applications are presenting new opportunities for both capital growth and income generation through “rehypothecation,” or the ability to use collateral to invest further and earn.
Alternative Investments for Different Times
As most will know, crypto has crowned some of the world’s youngest billionaires and millionaires in an incredibly short time, and developments in DeFi have been key to building this wealth.
A wave of institutional investors has entered the crypto arena lately. The Financial Times reported that institutional investors made an estimated 44% of all crypto trades by the middle of last year.
Additionally, big money is targeting the crypto sector at its roots, and venture capital has been flooding into the development of DeFi startups at a tremendous rate. In 2021, Venture Capital investors poured around $33 billion into DeFi and other blockchain projects.
As investors allocate billions of dollars worth of crypto assets to DeFi, the sector has been declared a new Wild West by the US Securities and Exchange Commission (SEC). Of course, with every gold rush comes significant risks, and diversification is key - just as much in cryptocurrency as any other financial assets class.
However, many companies spearheading the DeFi movement continuously deliver products and services that increase capital efficiency. Often, these firms offer their equity as digital assets that can be used along with bluechip crypto assets like BTC and ETH to earn yield in DeFi. This provides a strong incentive to early adopters that may benefit significantly from future token price growth.
Earning Yields While Growing Capital
Recent market conditions have, arguably, made it an excellent time to start investing in alternative assets like DeFi. The bear market shakeout and ensuing lack of saturation have created an opportunity for individual investors to compete for better yields against fewer large investors.
By using DeFi-based financial applications, investors can borrow, lend, and trade crypto without the aid of a broker or lender. Essentially, web-based applications handle all transactions in DeFi. In the absence of a third party like a broker or lender, investors who provide liquidity (crypto tokens) to these apps receive the fees generated when their assets are borrowed or used for trading.
For example, you can trade for ETH, the cryptocurrency of the Ethereum network, for a 0.2% fee on a DeFi exchange app. When this trade is executed, you pay a 0.2% fee that is distributed to other users like you, and this fee usually ends up totaling far less than what you will spend trading crypto on a centralized exchange like Binance or Coinbase.
After acquiring ETH tokens, you can hold onto ETH like a certificate of equity and wait for it to appreciate in value, or you can put your ETH to work. You can earn a share of the 0.2% trading fee by letting the app use your ETH tokens, and there are billions of dollars of tokens exchanged on these apps every day.
Right now, there are over 10,000 different tokens available on the crypto market, and a vast number of these tokens are traded through DeFi applications by savvy traders who preserve capital by avoiding exchange fees while frequently taking profits during highs and selling during lows.
What You Should Do Before Investing in Crypto and DeFi
Of course, you should do your own research and due diligence before taking a position in any kind of investment opportunity. It’s also highly recommended that you only invest what you can afford to lose when participating in the crypto market and DeFi.
You can tap into many resources to increase your knowledge of the crypto and DeFi landscape before you begin investing. Both crypto and DeFi present new investors with concepts and terminology that are challenging initially, but once you get the hang of it, this emerging investment opportunity will begin to make more sense.
Unfortunately, the information you’re looking for won’t be found in the traditional media, since that time has not yet come. About the same number of people are using blockchain technology today as the number of people using the internet in 1995, which means this space is still incredibly early and ripe for investment opportunities.
Google will assist you with discovering the basics about crypto and DeFi, but when you want to increase your knowledge at a more granular level, you’ll need to dive into social media for the most up-to-date information. You should become familiar with using Telegram, Discord, and Twitter to find the most relevant information about current trends and what firms are succeeding and what firms are in decline.
Once you feel comfortable that you’ve done enough research to begin investing in crypto, then you can take the first steps toward investing in DeFi. Since DeFi’s web-based applications cut out the middleman, there won’t be a customer service department you can turn to if something goes wrong, so you want to be 100% confident that you know what you are doing.
Taking the Next Steps and Becoming an Active Investor
You’ll need to start off by buying your crypto tokens from a major exchange that allows you to make purchases from a card or bank account. The exchange that you purchase tokens from will retain custody of your assets until you withdraw them to the blockchain of your choice.
In order to gain custody of your tokens so that you can invest them in DeFi, you will need to download a crypto wallet on your laptop or phone. There are a plethora of crypto wallets that have been released in the last few years, so you should again do your own research to find a wallet that suits your needs.
When you set up your crypto wallet, you will need to write down a series of 12 or 24 words known as your “seed phrase.” This secret code is like a password that allows you to regain access to your crypto wallet if you have to replace your laptop and re-install your wallet software.
Your seed phrase is incredibly important–so important that some crypto millionaires have armed guards protecting their seed phrases at the bottom of a mountain in Switzerland. Never share your seed phrase with anyone, and keep your seed phrase written on a piece of paper in a safe place, or you could lose access to your crypto wealth if something happens.
Once you have installed and set up your crypto wallet, you can withdraw your crypto assets from a centralized exchange onto a blockchain. After you do this, you gain full custody of your assets, and you can do whatever you want with them via your crypto wallet and an internet connection.
Finding Income Strategies in a Shrinking Pool
DeFi seems to have set a goal of replicating nearly every traditional financial service available. Investors can borrow assets to leverage their positions, or they can be the ones putting their capital to work in money markets by lending.
Traders can even write covered calls and puts in DeFi options markets. Additionally, a whole new set of financial primitives are being discovered and put to work in DeFi. The programmatic nature of investing through applications means there are strategies investors can follow that are simply not available in traditional financial markets.
DeFi provides investors with many creative ways to make money. What’s also really amazing about DeFi is that you can use any of these financial tools at any time of day and from anywhere in the world, no matter who you are, creating a truly global financial paradigm, the likes of which we haven’t seen before.
DeFi investors are working with as little as $50 worth of assets, and there are also individual investors with hundreds of millions of dollars working in the DeFi system.
A rare opportunity for generating wealth is brewing in a “perfect storm” for early DeFi adopters in this nascent sector of Fintech. Many of these are chasing the early trend before an institutional “land grab” takes place, and many sophisticated investors with risk appetites are following their lead.