The Future of Crypto
A correction in the crypto space provides opportunity to get into the future of finance. Here's where I am putting my own money.
The crypto currency market has been crashing these past few days and it is starting to look like an attractive arena to begin accumulating again.
However, it's not just any crypto coin or token you need to consider. Many will fail so it is important to consider some broad themes when allocating your investments.
Here's what I am doing and why.
Firstly, I consider that different crypto has different roles and understanding that role will help make appropriate decisions.
I consider Bitcoin to be a form of digital gold and its future role as a store of value. Now I know you can't use it as jewellery and it doesn't have the history, but otherwise Bitcoin offers many of the same characteristics of bullion.
It is scarce and costs money to mine more. Bitcoin supply is capped at 21 million coins while historically gold supply has increased at around 2% per annum. As long as people perceive them to be appropriate stores of value, they will be.
Neither have counterparty risk and are considered a bearer asset, in that once you have possession, no one can lay external claim to that asset. They are exchangeable by whoever holds them.
Bitcoin accounts for around 35 per cent of my crypto portfolio.
Price at time of posting AUD $45,150.76
Ether is the second largest crypto currency in capitalisation. It uses different network protocols to bitcoin and thus is more suitable as a medium of exchange, for smart contracts and commercial activities.
Ether is now the largest percentage of my crypto portfolio (around 50 per cent). Price at time of posting is AUD $2682.55
That's what makes it attractive to me. It has real commercial potential and the applications developing around Ether are likely to change the way we do business in the future.
Some of these applications involve switching ether into other 'tokens' that allow certain activities to take place. Perhaps the most exciting of these areas for me is what's known as Decentralised Finance or DeFi.
Decentralised Finance (DeFi)
Here's how Wikipedia describes DeFi.
Decentralized finance is a blockchain-based form of finance that does not rely on central financial intermediaries such as brokerages, exchanges, or banks to offer traditional financial instruments, and instead utilizes smart contracts on blockchains, the most common being Ethereum.
DeFi platforms allow people to lend or borrow funds from others, speculate on price movements on a range of assets using derivatives, trade cryptocurrencies, insure against risks, and earn interest in savings-like accounts.
DeFi uses a layered architecture and highly composable building blocks. Some DeFi applications promote high interest rates but are subject to high risk.
By October 2020, over $11 billion was deposited in various decentralized finance protocols, which represented more than a tenfold growth during the course of 2020.
DeFi tokens are essentially ideas that run off of the Ether protocol with adaptations to make them more practical and easier to use. Buying them is a bit like picking a winner between Beta and VHS video recorders.
The best may not prevail and many will be rendered worthless.
Nevertheless, I think DeFi is set to be the next big thing and I have been buying a basket of tokens in areas where I think there is a possibility of success. It's most likely I'll lose money in most of these 'punts' but if only one pays off it will cover many multiples of those losses.
Naturally, I am aware that they could all fail and another 'token' may prevail so I am prepared for a total loss. Hence these investments are small and if a total loss happens it won't be material to my way of life.
What DeFi Tokens Have I Bought?
It needs to be clear that these purchases, while based on some research are just instincts. I know finance very well but my purchases are based on how interesting I found their 'story' and my assessment that they are not a total scam.
It remains to be seen whether I am correct or not.
Aave, which comes from the Finnish word for "ghost", is a lending and borrowing decentralised finance (DeFi) protocol built on the Ethereum blockchain.
Founded in 2017, the protocol was originally called ETHLend and focused entirely on lending Ether. Since a rebranding in 2018, Aave has grown to be one of the largest money markets in the DeFi lending space.
Aave is a non-custodial service meaning cryptos are never stored directly with Aave. Deposits are always controlled by the user.
Price at time of publication is AUD $365.55
The 0x website states that 0x is important infrastructure for the emerging crypto economy and enables markets to be created that couldn't have existed before. As more assets become tokenized, public blockchains provide the opportunity to establish a new financial stack that is more efficient, transparent, and equitable than any system in the past.
They have their own token which uses the code of ZRX
Price at time of publication is AUD $1.05
Sushiswap is a relatively new DeFi protocol. In essence, SushiSwap is a decentralized exchange (DEX) with an Automated Market Making system (AMM). Just like regular market makers add liquidity to both sellers and buyers, an AMM adds liquidity from several digital assets in smart contracts called liquidity pools.
Price at time of publication is AUD $11.27
1inch is a distributed network for decentralized protocols on Ethereum and BSC (Binance Smart Chain) enabling the most lucrative, fastest and protected operations in DeFi (decentralized finance).
Price at time of publication is AUD $3.09
Please understand that none of the above is investment advice. It is merely a record of where I am at in respect to putting money into cryptocurrency.
I consider it all high risk but picking a winner in DeFi is going to amount to luck which is why I am spreading small amounts of money across multiple opportunities.
However, I am confident that the future of finance is in DeFi and whichever of the protocols gets the establishment tick of approval will be a massive winner. It could be none of those I have chosen which is why I shall keep looking for opportunities.
I'll also continue to purchase Ether and Bitcoin on a regular basis. You can call this dollar cost averaging as I believe in the future (5 -10 years) they will trade at many multiples of their current prices.
That said, there will be massive fluctuations along the way. It'll be a test of emotions more than finances!
I use Easy Crypto to purchase all my crypto using my Australian bank account. It's fast, easy and safe and the team are very helpful.
I recommend them to anyone interested in getting started.