Given the promise of DeFi and crypto assets, they should minimize their risk by doing due diligence on the cryptocurrency they are investing in.
Despite decades of innovation, traditional finance still requires enormous amounts of human capital to power financial activities, with transactions like cross-border settlements taking days to process. Entrepreneurs who want to innovate with better financial products are often stifled by the high capital requirements of central banks in different countries. In addition, important decisions such as repo rate setting, which have an impact on the cost of raising capital, affecting billions worldwide, are made by a small group of individuals and often against the public interest. With the emergence of Decentralized Finance (DeFi) as a new financial medium that harnesses the power of blockchain technology, a more democratic financial system is now available to a global audience.
While Bitcoin (BTC) is the forerunner of all forms of digital assets we see today, the rise of DeFi has spawned other cryptocurrencies, including altcoins and stablecoins, which are used for transactions with the various DeFi applications available today. This has also spawned a new class of digital assets called Non-Fungible Tokens (NFTs), which are unique digital representations of contemporary art forms that allow their owners to digitally monetize them. P2P (peer-to-peer) transactions of these digital assets have been the dominant force behind the huge growth of the crypto space by removing all intermediaries and harnessing the power of DeFi. This unprecedented level of interconnectivity enables its users to access better interest rates and seamless transaction opportunities regardless of their geographic location.
Born between the mid-90s and early 2010, most GenZ investors are increasingly switching to the new financial products that DeFi makes possible. Major demographic classes of GenZ and Millennial investors are driving DeFi as they prefer digital means and are more inclined to experiment. Given the drawbacks of traditional finance and the DeFi-sponsored concept of universal equality, this young class of investors is scooping digital assets like cryptocurrencies and NFTs for both investment and transactional purposes. According to the latest CNBC Millionaire poll, nearly 40 percent of millennial millionaires have 50 percent of their portfolios in digital assets and are expected to keep growing. One such investor is Keefe Tan, who started crypto investments at the age of 17 when BTC was trading at ~ $ 40 and now holds over $ half a million in digital assets after having invested just $ 500 had started. After realizing the potential of blockchain to disrupt the financial sector and other industries such as healthcare, education, agriculture and entertainment; Keefe doubled his conviction by building basic knowledge and staying up to date on developments in the Blockchain / DeFi space.
Despite these general upward trends, investors should exercise caution and understand that not all crypto coins / tokens are solid investments. Naive investors end up betting on altcoins that lack solid fundamentals just to make a quick profit. A notable example is that of Dogecoin, a decentralized P2P digital currency that was intended as a “joke” according to its founders. However, at the height of the Memecoin mania, Dogecoin market cap exploded to $ 90 billion before dropping to around $ 32 billion today. Regardless of some investors who likely made millions in the rally, more and more investors lost their capital by investing out of time at the top. Such speculative transactions increase the likelihood of losing the invested capital due to unclear trading decisions. Rather, investments in cryptocurrencies should be driven by understanding the problems the underlying project is intended to solve and understanding metrics that measure DeFi transaction volume. Small capitalization crypto tokens have a higher probability of profitability with an associated higher risk. As an example, Keefe was one of the 11,000 odd investors who were stolen ~ $ 60 million worth of Ethereum when the blockchain was only about a year old. This was due to a bug in Ethereum’s smart contract algorithm that eventually led to the US SEC’s Howey test, which is now used to determine how safe a token is for investment.
Ride on the current hype is not recommended, and investors do well to remember that there is no regulator to turn to to get back lost funds. However, given the promise of DeFi and crypto assets, they should minimize their risk by 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 or storing assets. Funds that remain on an exchange are also at risk. It is best to trade with exchanges that have adequate insurance coverage. After all, in order to benefit from this booming and yet disrupted asset class, it is important to keep your feet firmly on the ground and keep an eye on the future.