Welcome to the third and final guide in the series written and produced in partnership with Zerion. These guides will lay out the things you should consider as you enter the world of decentralized finance – including investment strategies you might want to follow, and how to take action today.
This final guide will look at the most popular DeFi investment strategies out there and how you can safely get involved. If you missed the first two parts, check them out below.
DeFi is more than just a buzzword: it’s short for decentralized finance and describes financial services that operate on open source blockchains. By bypassing centralized financial intermediaries, anyone in the world can take full control of their assets using a smart device with an internet connection.
Investing in DeFi has become much easier with a non-custodial asset management platform like Zerion. All you have to do to get started is to create and connect your Ethereum wallet to Zerion. Once that’s done, you can start strategizing over and building out your DeFi crypto portfolio.
There are a few key strategies to choose between when investing in DeFi. Ultimately, what you go for depends on your risk tolerance. Here are four DeFi investment strategies you may want to consider.
The simplest strategy for any new cryptocurrency investor is to “Hodl”. After a post in a crypto forum in 2013 featured a typo in the word “hold” when discussing a “buy and hold” long-term investment strategy, “hodl” became the tongue-in-cheek term for holding on to what you buy come what may, ignoring the ups and downs of the market.
At first glance, HODLing appears to be the easiest way to go about building your portfolio, but it may not be the smartest. After all, it solely relies on the value of your crypto holdings rising over time, and in so doing ignores the opportunities DeFi offer in generating passive income from your crypto holdings.
The DeFi rule of thumb is this: no money sits idle. Fortunately, DeFi investing apps like Zerion offer easy ways to put your crypto to work.
In DeFi, you only need to provide collateral to either borrow or lend crypto assets. There’s no credit check by banks that control the approval of a loan. Instead, a smart contract serves as an automated digital “intermediary” that sets rates based on the coins available in a collection of funds also known as a liquidity pool.
Lenders who supply tokens in a liquidity pool usually hope to gain a profit via interest. Loans issued in a DeFi protocol are usually “over-collateralized”, which means borrowers provide a guarantee in the form of crypto worth more than the actual loan.
But DeFi lending and borrowing differ in more than just the mechanics of decentralized money markets: interest rates can be extremely favorable. While the average savings rate at US banks is just 0.09% per year, most DeFi deposits earn between 1-5% and accrue interest every 15 seconds.
These two strategies often go hand in hand, and are enabled by the lego-like compatibility of most DeFi opportunities.
Staking is one of the simplest ways to put your crypto to work. By locking up your idle assets, you contribute market liquidity and play a part in ensuring the safe operation of decentralized financial services. Most DeFi projects offer staking rewards in the form of governance tokens which can either be kept as voting power or traded. Just like traditional saving, the longer you stake your DeFi assets, the more you earn.
Yield farming is a more complex investment strategy that combines lending, borrowing, and staking in order to maximize profits through interest earned and staking rewards.
While yield farming offers some of the highest gains in DeFi, it also carries the highest risk.
Here’s an illustrative example of how you might do it: you take out a loan and swap the borrowed funds for some other high-performing token. Then, using that token, you provide collateral for another loan, and stake those borrowed assets.
With large amounts of capital, an investment can thus be folded many times over in order to maximize the interest and staking rewards you earn.
Compared to yield farming, then, staking is a safer passive investment strategy because it doesn’t involve borrowing at high-risk interest rates or collateral ratios.
Indexes are one of the easiest ways to diversify your crypto portfolio.
In traditional finance, exchange-traded funds (ETFs) track the prices of several assets all together – like an S&P 500 ETF tracking the price moves of all 500 companies in that index. DeFi indexes are similar, except the assets you’re investing in are crypto tokens.
And just like ETFs, one of the attractions for investors is that tokens in a given index are often selected on strict criteria such as by size or volatility. That allows investors the flexibility to effectively outsource analysis and research it’d ordinarily take to select tokens for your portfolio to the index provider.
One such example is the DeFi Pulse Index, which groups the largest DeFi projects. Another is the MetaVerse Index, which lets investors bet on the future of non-fungible tokens (NFTs) as it contains the biggest NFT protocols in DeFi.
Regardless of your investment strategy and risk appetite, you can make your investment process easier with Zerion – a non-custodial asset management platform that aggregates DeFi activities in one place. You can explore every DeFi protocol and token so you can build your DeFi portfolio all in one user-friendly app. Take the first step in DeFi investing by getting started on Zerion app today.
In part one of this guide to DeFi, we gave you an introduction to the decentralized finance ecosystem.
In part two, we explored how you can begin to get involved using a platform like Zerion.
And in this final installment, we’ve given you some of the most popular DeFi investment strategies, so you can put the knowledge you’ve gained from parts one and two into practice.
Congratulations on taking the time to get smarter on DeFi, and good luck – we’ve probably got an exciting few years in store.
This guide was produced in partnership with Zerion.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.