Published February 10, 20227 min read

How to Invest in DeFi: Best Ways and Strategy

CoinMooner Team

It is time to find out how to invest in DeFi since if you follow the news in the field of finance, you already know that e-money is actively developing. The creation of cryptocurrency and its active promotion was initially met with a degree of skepticism, but now it is a modern and technologically advanced way of earning.

Invest In DeFi: Why It Is Profitable

It is profitable to invest in DeFi now since there is a demand for it. As the number of people interested in DeFi and the volume of transactions increases, the income derived from the market also grows. It is also important to know that the profitability of DeFi is running up due to the rise of the main cryptocurrency – Bitcoin. More users are interested in how to invest in DeFi, which means that more people have savings in cryptocurrency. The stakes in DeFi are rising, as platforms are willing to share a larger percentage with those who “open deposits” there.

What Is DeFi?

Simply put, Decentralized Finance comprises services and applications that work as traditional tools of the financial sector. They are based on blockchain technology, and their main task is to provide services independently from the banking sector and allow users to save on fees for transfers, loans, and deposits. Most DeFi projects are based on Ethereum.

DeFi plans to become an alternative source of financial transactions or even completely replace the principles of the modern financial system. Open-source protocols serve as the basis for these instruments. In the future, they will open up opportunities for people to take advantage of decentralized lending and new investment platforms. In turn, this will entail an increase in passive income from cryptocurrency assets.

How to Invest in DeFi?

At the moment, there are 2 main ways to invest in DeFi. In general, the first one is investing in tokens of DeFi projects, and the second one is contributing funds through project platforms (deposit) and/or receiving loans. You can learn more about each DeFi strategy below.

Where to Buy Tokens?

You can choose one of three main ways to buy tokens – centralized and decentralized exchanges, cryptocurrency wallets, and P2P purchases.

There are a lot of crypto exchanges operating in the jurisdictions of different countries. It is not enough to know the exchange rate on a particular exchange to understand whether it is profitable to conduct transactions and buy tokens — you also need to know the size of commissions. Another option for acquiring tokens is through cryptocurrency wallets. The principle of operation is the same as that of a regular exchange – you transfer money to an organization and receive a certain amount of cryptocurrency in return. This is a fairly simple way to buy a digital asset – as a rule, transactions are made instantly, and many platforms do not require extensive identity verification for small transactions. You can also buy tokens through a P2P service. It can be compared to a marketplace: sellers place ads for the sale of assets, and buyers choose the right ones. You can find some of the most profitable rates on such sites.

What Should You Pay Attention To?

There are a few rules to pay attention to:

Fees that are too low may mean you are dealing with scammers rather than a reliable exchange. You can check the reliability of the platform using a blockchain reviewer and well-known audit companies. If you understand smart contracts, you can check for critical errors and vulnerabilities yourself. Remember that fair projects always release open source codes.

In addition to learning how to invest in DeFi, you need to research a crypto exchange’s approach to security. Unfortunately, these trading platforms often become victims of hackers.

Do not forget that it is better to withdraw the cryptocurrencies that you are not going to trade in the near future to a cold wallet.

Do not invest more than you can afford to lose.

Which Tokens Are Worth Noting?

Uniswap and Chainlink were considered some of the best DeFi investments in 2021.

Uniswap is a decentralized exchange powered by the Ethereum blockchain. It allows anyone to provide liquidity to a pool of Ethereum-based tokens or exchange various ERC-20 tokens without intermediaries.

Chainlink is a blockchain oracle offering an amazing and unique use case for the blockchain network. It aims to link smart contracts on various blockchains with off-chain data in the real world. Many companies such as Swift, Google, Theta, Aave, Synthetix, and Huobi have partnered with Chainlink. This, of course, increases the likelihood of a project being successful in the blockchain space.

Terra and Stacks could have great prospects in 2022. The first is a blockchain protocol that creates fiat-pegged stable coins. LUNA token holders can propose how to improve the blockchain and vote on the proposals. The second project is a blockchain solution for the implementation of smart contracts based on Bitcoin. Applications created in the Stacks ecosystem inherit all the features of the first cryptocurrency.

Best DeFi Investment Strategies

Before choosing the best DeFi strategy, you still need to figure out which projects are the most beneficial. It is important to study all the founders and developers of a project, along with their previous achievements. You need to make sure the team has identified their target audience’s problem they can potentially solve. Before you enter the project, you must understand what it earns from and how investments are distributed.

HODL

HODL is one of the basic investment strategies. Its essence lies in the purchase of tokens for long-term storage instead of constant trading. This approach assumes that despite the ups and downs, the coins will be worth more in several years. Practice shows that cryptocurrency exchange rates can both fall and grow by 2-3 or more times, so the main task of hodlers is to accumulate more cryptocurrency and be patient.

Borrowing and Lending

Lending or borrowing is a kind of leasing digital assets. In other words, the process can be described as lending cryptocurrencies at a certain percentage. A user already owns or acquires a certain number of coins and then leases them to a third party (platform), which will put the funds into circulation and act as a guarantor of their return. Lending is one of the ways to make the cryptocurrency "work". This is an opportunity to get real money without having to sell your coins.

Staking and Yield Farming

The next DeFi strategy is staking. In fact, this is a way of obtaining passive income where users store coins according to the Proof of Stake (PoS) algorithm and ensure the performance of the blockchain. This gives them the right to make a profit. This opportunity is available only to cryptocurrencies that work on PoS.

Yield farming is another option for users of DeFi protocols to generate additional profit (usually, in the form of pilot tokens) from providing loans and liquidity to decentralized exchanges.

Liquidity Providing

Providing liquidity means giving an opportunity to buy or sell a trading asset at a current price in the shortest possible time. Basically, the role of liquidity providers is assumed by exchanges, cryptocurrency wallets, stockbrokers, representatives of marketplaces, and so on. Usually, the provider buys an asset from someone with its own funds and then puts it up for sale.

Indexes

Data analytics is an essential part of DeFi investment. And that is where cryptocurrency indexes play an important role. They are indicators of the capitalization and volatility level of a particular cryptocurrency. In other words, this indicator reflects the current power of a token, the mood of the market and investors. To date, there are five largest altcoin indexes: Crypto Market Index 10, Bit20, CAMCrypto30, CCI30, and CRIX. Each indicator has its own characteristics and priorities.

Short Term vs. Long Term Strategy: What to Choose?

If you use a short-term strategy, you are interested in selling your digital coins to get a quick profit. This strategy is very popular among players since you can make profitable trades until the cryptocurrency price falls sharply. If you choose a long-term approach, you should have confidence in the chosen cryptocurrency and strong nerves to avoid succumbing to provocations. The long-term strategy is based on working with promising currencies and keeping your funds. When choosing tokens for investment, it is worth studying niche news and forums and learning their ROI.

When to Start Selling Tokens?

There is no definite answer to this question. First of all, you should pay attention to the news about changes in the value of cryptocurrencies. Secondly, it is worth conducting an independent market analysis, which will guide you in the right direction.

Invest in DeFi: Pros and Cons

Advantages:

absence of control from financial institutions

rapidly developing area

interest from many global companies

quick income opportunity

Disadvantages:

fraud risk

risk of loss and inflation

time expenditures to study the area in detail

Frequently Asked Questions

Is It Worth Investing in DeFi?

Investing in DeFi has high potential. This is 100% worth doing if you have extra funds.

How to Invest In DeFi?

You can invest in DeFi using various strategies, the main of which are purchasing tokens or depositing funds through project platforms and/or obtaining loans.