Considering the promise of DeFi and crypto assets, they should minimize their risk by conducting due diligence on the cryptocurrency they are investing in.
Despite decades of innovation, traditional finance still requires massive amounts of human capital to drive financial activity with transactions like cross-border settlements taking days to be processed. Entrepreneurs wanting to innovate with better financial products are often stifled by the large capital requirements necessitated by Central Banks across different countries. Additionally, important decisions like the setting of repo rates, impacting the cost of raising capital and affecting billions globally, are being made by a small set of individuals and often against the interest of the public. However, with the advent of Decentralised Finance (DeFi) as a new medium of finance that leverages the power of Blockchain technology, a more democratic financial system is now available for a global audience.
While Bitcoin (BTC) is the precursor to all forms of digital assets that we see today, the rise of DeFi has spawned other cryptocurrencies including Altcoins and Stablecoins that are used for transacting on the various DeFi applications available today. This has also given rise to a new class of digital assets called Non-Fungible Tokens (NFTs) which are unique digital representations of contemporary artforms that are enabling their owners to monetize them digitally. P2P (Peer-to-Peer) transactions of these digital assets have been the dominant force behind the tremendous growth of the crypto space by removing all intermediaries and leveraging the power of DeFi. This previously unheard-of level of interconnectivity is allowing its users to access better interest rates and seamless transaction ability regardless of their geographical location.
Born between the mid-90s and early-2010s, most GenZ investors are increasingly switching over to the new financial products made possible by DeFi. Key demographic classes of GenZ and Millennial investors are powering the rise of DeFi as they prefer digital means and are more inclined towards experimentation. Considering the demerits of traditional finance and the concept of universal equality promoted by DeFi, this young investor class is lapping up digital assets like cryptocurrencies and NFTs for both investment and transaction purposes. As per the recent CNBC Millionaire survey, nearly 40 percent of millennial millionaires have 50 percent of their portfolio in digital assets and is projected to grow further. One such investor is Keefe Tan who started crypto investing at the age of 17 when BTC was trading at ~$40 and is now holding digital assets worth over half a million dollars having started with a mere $500 investment. Having recognized Blockchain’s potential to disrupt the financial sector and other industries including Healthcare, Education, Agriculture and Entertainment; Keefe doubled down on his conviction by building foundational knowledge and staying informed about developments in the blockchain/DeFi space.
Despite this general bullishness, investors should exercise caution and understand that not all crypto coins/tokens are sound investments. Naive investors end up betting on altcoins that lack sound fundamentals just to turn a quick profit. A notable example is that of Dogecoin, a decentralized P2P digital currency, that was intended as a ‘joke’ as per its founders. Yet, at the height of the memecoin mania, Dogecoin’s market cap exploded to $90billion before plummeting to around $32 billion currently. Notwithstanding some investors who probably made millions in the rally, more investors lost their capital from ill-timed investments at the peak. In such speculation trading, the probabilities of losing one’s invested capital increase due to obscure trading decisions. Rather, investments in cryptocurrencies should be driven by understanding what issues the underlying project aims to solve and understanding metrics that measure its DeFi transaction volume. Crypto tokens with low market capitalizations have a higher probability of profitability with an associated higher level of risk. As an example, Keefe was one of the 11,000 odd investors from whom ~$60million worth of Ethereum was stolen when the blockchain was only about a year old. This was due to a bug in Ethereum’s smart contract algorithm which eventually led to the US SEC’s Howey Test that is now used to determine how secure a token is for investment.
Riding on the current hype isn’t recommended and investors would do well to remember that there is no regulatory body to approach to recover lost funds. However, considering the promise of DeFi and crypto assets, they should minimize their risk by conducting due diligence on the cryptocurrency they are investing in. To prevent hacking, it is advisable to have both hot and cold crypto wallets for trading and asset storage respectively. Funds left on an exchange are also at risk it is best to trade with exchanges that have adequate insurance protection. After all, to gain from this booming yet unhinged asset class, it is important to have one’s feet firmly on the ground with an eye on the future.
Source: Business World