A Detailed Guide to Investing in DeFi
According to the Chinese zodiac sign for the new year, 2019 was the year of the pig, symbolising good fortune, prosperity, and wealth. 2019 was also the year that crypto and decentralised finance took the world by storm.
From $700 million to $20 billion in total value locked, DeFi experienced worldwide adoption courtesy, partly of the hordes of investors that flooded the market. With the promise of a fast-growing and unregulated market, many investors flocked to DeFi in the hopes of filling up their passive income coffers.
It paid off, and today, investing in DeFi is one of the great ways to diversify your portfolio as an investor.
What is DeFi, And Why Is It Important?
DeFi is decentralised finance. It is a general term that describes a new financial system independent of centralised control and third-party intermediaries. In place of a third party overseeing financial agreements, DeFi uses computer codes known as smart contracts.
It was designed to solve the problems of centralised finance. Where bank transactions take a while to confirm, with DeFi, transactions are verified in minutes. Financial activities like lending, borrowing, and currency exchange, can all be done on DeFi, without needing intermediaries.
DeFi gives users total ownership over their assets and control over their transactions. It also takes away banks and other third parties that are a part of transactions in traditional finance. By removing them, DeFi also eliminates the extra charges they collect per transaction.
Of all these importance, providing users with options for their financial activities is the most significant reason why DeFi is important. Under centralised finance, users are “forced” to use one system. DeFi proposes a second option, allowing users more autonomy over their finances.
A Detailed Guide to Investing in DeFi
DeFi offers a healthy albeit unregulated environment for investors. They are drawn to the thriving space with high yields and interest rates. If you’re looking to diversify your investment portfolio with DeFi, you’re in the right place.
Here’s a step-by-step guide on how to start.
Choose a Wallet
Your journey into DeFi begins with a crypto wallet. Think of it as a digital wallet that can hold multiple currencies and their corresponding addresses.
Crypto wallets hold a special significance for investors in DeFi because they are used for sending and receiving cryptocurrencies, two transactions essential to investing in DeFi.
There are so many crypto wallets, so choosing one might be a bit confusing. Regardless, you’ll need at least one crypto wallet, so here are some factors to consider.
- How secure is the wallet;
- Reviews and User Testimonials;
- Wallet compatibility with multiple devices;
- Wallet UX.
Some of the best crypto wallets out there for DeFi investors include:
- Trust Wallet;
- Coinbase Wallet;
While setting up your crypto wallet, store the important keys and information. Losing them might mean losing your assets or leaving yourself open to a third party gaining access to your investments.
Buy Crypto Coins
The next stop after setting up your crypto wallet is buying crypto coins. You’ll need currencies to purchase and begin your investment journey in DeFi.
There are hundreds of cryptocurrencies worldwide, and you can purchase any of them. However, to be safe, stick to two of the most popular cryptocurrencies in the world – Bitcoin and Ethereum. Since most protocols are launched on the Ethereum blockchain, you can start with ERC-20 tokens.
As you start investing in protocols, you’ll have to purchase DeFi coins built on native blockchain networks named after them. Examples include Aave, Ankr, and Uniswap.
DeFi works with protocols that facilitate trading, staking, and lending. A DeFi protocol is an autonomous program that enables cryptocurrency trading, borrowing, lending, and other financial activities.
These protocols are governed by smart contracts that set the rules and principles of engaging in specific financial activities. This means that there are protocols for every activity.
Selecting the suitable protocol for your investment is essential; it determines how safe and successful your investment will be. So be sure to carry out ample research before you make a choice. Remember that the protocol you decide on depends on what type of investment you’d like to make. Yield farming, lending and borrowing don’t use the same protocols.
When you’ve chosen a protocol, the next step is to link the protocol to your wallet for seamless access to your coins. After this, they will guide you on how to get started.
Track your Investment
At this stage, it’s safe to say that you’ve chosen a protocol and followed the self-explanatory instructions for your first investment. Congratulations! But your DeFi investment journey isn’t over yet. If anything, it might have just started with this tracking stage.
The tracking stage is where the work is. Here, you will monitor and manage your investments. A good portfolio tracker provides updated portfolio analytics to help you make the best decisions.
Valk has one of the best portfolio trackers. Aptly named Merlin, this portfolio tracker shows in-depth historical and current analytics, allowing you to focus on creating profitable investing strategies in DeFi.
To make use of Merlin, download the Merlin app. The dashboard on Merlin has a simple design, making it easy to use even for beginners.
Next, connect your wallet to Merlin and have access to your portfolio across protocols.
Some of the perks of using Valk are:
- Calculation of total Profit and Loss based on investment strategy;
- Portfolio and Assets Overview shows the total value of individual assets and the portfolio as a whole;
- Historical Price Data;
- Compares portfolio value to ETH and USD Values;
- Calculation of total Yield Generated;
- Estimation of total Gas Fees.
Decentralised finance is the newest digital trend on the market for its rapid growth and multiple opportunities for passive income generation. Investors flock to DeFi in droves, hoping to get a piece of the pie, and yet without a guide, many investors make costly mistakes. The step-by-step guide above can help you start investing in DeFi without falling into the common pitfalls.