Cryptocurrency Investments in 2021: The Future Is Now
What if you’re an investor and don’t want to miss out on the crypto revolution?
I feel like every day that I’ve woken up in the past few weeks there’s been some great news in cryptocurrencies. Bitcoin broke 40K and Ethereum started rallying in its foothill. And then, bam, it was alt season. Almost everything started going up. Just within a month, the Decentralized Finance (DeFi) market grew over 180%! In comparison, it took the S&P roughly 82 years to grow the same amount. Take a look below:
But the crypto world is a treacherous place for the trader. Exciting as the highs are, the frequent intraday dumps and crash constantly eat through your gains. In the same week that I saw young traders with deep pockets make their parents’ retirements in cryptos, I also witnessed people losing their net worth being overleveraged and excited at the top. Indeed, trading with leverage has always been a risky business, but ships sink harder in shallow waters, and many crypto markets’ low liquidity can make long-term trading growth impossible.
The good news is that cryptocurrencies now represent so much more than the just potential for traders.
Thankfully, the DeFi world has grown to parallel the Fiat system in many ways, only the opportunities are much more accessible, and the returns are much higher!
So the question is, how can YOU, the consumer, take advantage of this wonderful technological revolution?
Unsurprisingly, the answer is access to the right information.
In this article, I aim to categorize the different investment pathways available to you in DeFi, and demystify the jargon used in the field. My goal is empowering everyone to take part in DeFi and benefit from the countless opportunities in blockchain!
Note to the reader: Keep in mind that I except you already know how blockchain and smart contracts on Ethereum work. I’m not going to spend time convincing you that blockchain is the future. There are already tons of great material available for that. My hope is that if you are here, you’re ready to find some practical information!
Content:
· Lending vs. Staking vs. Farming
· Examples of banking/investment alternatives based on your preferred risk level
“So how exactly did we go from digital money to farming things?”
Lending, Staking and Liquidity Farming explained
Stablecoin Lending — low risk
This one is pretty self-explanatory. Let’s say you have a sum of money to invest in our conventional system but want to take limited risk or want a more certain return on your equity. Naturally, you’d be drawn towards banking products like TFSAs, GICs and RSPs. When you provide them with your money, the bank would then invest it in a number of different ways including lending for much higher interest rates than you are given in return.
Why the large margin for the banks then? You might be inclined to explain it away with the risk concept, that the banks are taking on the risk of investments defaulting or that they lend much more than you invest so the returns are diluted.
Sure…but there’s also the fact that so far, there haven’t been any viable alternatives to them and they’ve fully enjoyed their monopoly on returns. How certain are you in the “fairness” of your investment returns? Really.
Well, that’s changing and banks know it. That’s why so many banks have been reluctant to acknowledge crypto’s potential. Here in Canada, many financial institutions still block crypto transactions from well-known payment organizations such as Simplex (used by Binance and other exchanges) and Crypto.com under “fraud” concerns.
“Why so”, you might ask, “when their counterparts have no problem facilitating such transactions?” I’m guessing partly it’s because they’re afraid.
But I digress.
Taking away the middleman through Smart Contracts on Ethereum, we have a similar system in DeFi that provides you with interest when you lend your equity.
Take a look at the snapshot taken from this website. It shows three of the largest “Stable Coins” highlighted, and their 30-day AVG lending rates through different DeFi organizations.
Stable Coins like DAI, USDC and USDT are crypto equivalents to the US Dollar. In other words, their price is pegged to the USD, therefore they will virtually always cost 1 USD / unit. With market caps of roughly $1.4B, $5.1B, and $24.3B, they’re all highly liquid and easily accessible. You can also see that the returns on the stablecoins are significantly higher than any savings account or GIC would provide you.
So why keep your funds sitting in a savings account, earning 1% APY when you could earn roughly 12% instead?
All you need is a DeFi wallet like MetaMask, and an account in a centralized exchange such as Binance or Crypto.com to purchase your stablecoins. I will create step by step guides for some of the best strategies in the near future, so be sure to check back!
Liquidity Mining — Moderate Risk
When you plan to travel, or want to purchase something in a foreign currency, chances are you’ll turn to banks for exchanging your funds. Similarly, when you decide to purchase the shares of a company, you have to do it through banks or centralized exchanges. In any way, when you exchange your assets through these organizations, you rely on their existing liquidity for fulfilling your transactions.
With more than 3000 different cryptos, decentralized exchanges play an integral role in providing liquidity to the market.
Though unlike Fiat that banks hold all the fees for providing liquidity to your transactions, DeFi relies on users for liquidity and also shares the fees with all stakeholders.
Let’s take the example of UniSwap, one of the largest Decentralized Exchanges (DEXs) today:
Here, I’m attempting to swap (exchange) Ethereum for FARM, a utility token developed by Harvest Finance.
For me to buy some Farm Tokens (which I’ll talk about below) using ETH, UniSwap would have to first exchange my ETH to USDC and then the USDC to FARM. This is because UniSwap holds two different liquidity pools that concern this transaction: the ETH — USDC pool and the USDC — FARM pool.
Liquidity providers join pools by adding both assets in equal amounts and receiving a return proportional to their equity size and pool activity.
If I confirm this transaction, my money would travel through the different pools and return to my wallet in the form of FARM tokens. In the process, I pay a “Gas” fee, that pays Ethereum miners, and a fee to UniSwap which is shared with liquidity providers in the pools.
Useful services have emerged to help us farm liquidity profits. Some bring different pools together to make comparisons easier, like Zapper.fi and some aim to create more efficient yield farming algorithms to improve liquidity mining’s ROI.
Enter Harvest Finance
Harvest’s main product, the FARM token is used to automatically delegate funds to the most profitable pools. The profits are then shared with investors in the form of FARM and other tokens. At the time of writing, FARM has an APY of 245.95%.
That means the simplest way you can earn passive income is by staking FARM and waiting for both your bag’s size, and it’s value to grow. Below is a chart of FARM’s price action since it became liquid on UniSwap.
But there’s so much more. Harvest also acts as a liquidity aggregator for other markets.
Let’s say there’s a new pair of cryptos that require liquidity on exchanges. Once you invest equal proportions of cryptos in their respective pool, you will receive Liquidity Provider (LP) tokens. The amount you receive is based on your equity size proportional to the size of the pool. As long as you hold the LP tokens and your equity is locked in, you will receive a portion of the exchange fees generated by the pool. The generated APY will be accessible once you remove your liquidity and return the LP tokens.
But what do you do with those liquidity tokens in the meanwhile? You earn even more passive income.
So far in 2021 Farm has had some massive returns for new trading pairs. Take the example of DAI — BSGS from above with a 1442.93% combined return in both Basis Gold Shares AND FARM! Since this article is intended to be more of an overview, I will be reviewing the different investment pathways in Harvest in my future articles instead! So be sure to check back soon!
Staking — Moderate to High risk
In short, staking is a better alternative to mining. Here’s a quick tech recap: One of the concepts that make blockchain secure is the decentralization of validation. For example, as a transaction on the Bitcoin blockchain occurs, it gets validated by several independent miners. For the case of bitcoin, mining is done through the processing power of GPUs for the decryption of the blockchain transactions and the addition of new blocks. So if the information is damaged or manipulated by one party, others would act as a failsafe and prevent fraudulent activity (roughly speaking).
Reliance on GPU and electric power for securing billions of dollars on the chain was not the best idea, so they came up with a better solution, Proof of Stake (PoS).
Now the crypto has the ability to validate itself. Basically, large pools of a token, or it’s Bonds, are chosen at random and are assigned the task of validating transactions. Most of these bonds are run by large organizations like crypto exchanges where their users can ‘stake’ their own cryptos and receive a return proportional to the size of their stake. Here’s an article by Binance Academy that discusses this in more detail.
Why and where to stake?
The above strategies are all examples of ‘applications’ on the Ethereum blockchain. They are more user-oriented, yet rely on the existing infrastructure for their technology.
Ethereums dominance in DeFi is partly the result of the hard work and genius of its founders, but just like the banks, there hadn’t been many strong alternatives to it so far. With the growth of PoS technology more and more infrastructure organizations like Cosmos, Cardano and Polkadot have emerged to rival Etheruem.
“Why do we need alternatives to Ethereum?” you might ask
I could write a whole article arguing both sides to this. But in a practical sense, the answer is really simple — Gas fees. The fees required for transactions are paid in ETH, and they can go as high as $40 USD just for signing a transaction or confirming a swap.
One of the requirements for mass adoption is accessibility, and Ethereum fails often in this regard. I’m not saying ETH 2.0 doesn’t have its promises, but more on that later!
Staking infrastructural assets like Cardano and Polkadot is a more technically oriented process. In addition, you are taking on the risk of the projects not making it to where they promised. On the other hand, this is exactly what everyone said when ETH was just starting. Infrastructure takes time to build, but the profits can be massive. Look at the chart below that compares ETH to Cardano, a PoS asset.
Notice how ETH was trading at around $75 just last year in March and how it sits at $1200 now. On the top, you see Cardano, which started trading on Binance roughly a year after ETH. Notice in meanwhile Ethereum’s massive 1500% run, Cardano topped 2000%! and has not even broken above the resistance created in May 2018. If you’re interested in staking, I found an awesome publication on Medium called Staking Facilities for you to learn more!
Closing Thoughts
The crypto revolution is happening now. There is no sense in staying completely out. You do not have to be an early adopter or infrastructure provider, but there are several ways for massive profits available to the average consumer. All you need is information and willingness to give it a shot!
Thank you for reading through! I’m happy to answer any questions you might have.
Disclaimer: The information presented in this article is gathered through personal experience and research. I do not receive any endorsements from the organizations mentioned above. This information is purely for educational purposes and should not be construed as investment advice.
