How To Invest In DeFi – Guide For Complete Beginners

With the immense growth of cryptocurrencies and the popularization of blockchain technology, one industry that has emerged surrounding this is DeFi. When Satoshi Nakamoto created Bitcoin in 2009, his main goal was to challenge the current financial system by introducing a decentralized currency. But despite this, most centralized organizations have managed to get their hands on some of the cryptocurrency sectors.

Luckily, DeFi is the one aspect that is still yet to be touched by these centralized organizations. Because of this, a lot of people are interested in this field and want to make investments, as there is a very big potential for DeFi to grow even further. So, what is DeFi and how can we invest in it? This is exactly what we will be discussing today.

What is DeFi?

Decentralized Finances, or DeFi for short, is a network of decentralized projects that, unlike traditional banks, centralized exchanges, and other traditional financial sectors, aim to make transactions peer-to-peer, without any 3rd party having to get involved.

With this, people making transactions don’t have to pay any fees, unlike with the traditional banking system where you are charged some sort of fee from every possible angle. It also increases the security possibility of your investments and other crypto funds. When using non-custodial crypto wallets, the code that gives access to your funds is given to you only, and not even the provider knows what it is. So the only way for someone to access your funds is if they hack into your computer, and you can make even this impossible by using a cold crypto wallet.

How does it work?

DeFi is built on regular blockchains, the same ones cryptocurrencies use to operate on. As we know, blockchain in itself is a decentralized network with very high levels of security, making it really easy for the DeFi industry to operate using this same technology. So, when transactions are made through DeFi, blockchains start working like normal, creating new blocks, verifying them, and creating chains, thus finishing the transaction with some of the highest levels of security possible, and in some cases, this is done in complete anonymity.

How to invest in DeFi?

This is a very fast-growing field, with millions of dollars worth of transactions made each day. Of course, centralized exchanges are still more dominant when it comes to numbers since they have a much easier time operating as they are regulated and receive some privileges from centralized organizations. If you don’t know exactly what you need to do in order to invest in DeFi, the following will be useful to you.

Create a personal crypto wallet

The first step of dealing with DeFi is to create your own non-custodial crypto wallet. Non-custodial wallets are crypto wallets where you are the sole owner and operator of the funds on your account. Having this type of crypto wallet is essential and you can not do anything inside the DeFi ecosystem without having it. Whenever you visit a website operating on DeFi principles, it will ask you to connect your wallet to the website in order to be able to use its services. This is due to the peer-to-peer nature of DeFi, as everyone using it needs to have their own wallet in order for it to be peer-to-peer.

When it comes to wallet choices, there are many options to choose from. For starters, there are hot and cold crypto wallets, with the hot wallets being software wallets, while cold wallets are hardware wallets. Software crypto wallets come as browser extensions or downloadable apps and are much more comfortable to use, but have a slightly higher chance of being hacked than cold wallets. Cold wallets come in the form of hardware and are disconnected from the internet unless you are making a transaction.

Choose where to invest your money

Once you have a crypto wallet, then you will need to fund your wallet with cryptocurrencies. Unfortunately, the easiest way to do so is to use centralized exchanges. But once this is done, you can then start looking around the DeFi space for projects and networks that you are interested in. Once you have found something you like, you will need to check what types of investments you can make.

One of the most common ways to invest in each DeFi project is to purchase cryptocurrencies associated with it. Almost every DeFi project will have its own cryptocurrency that is used inside the platform for doing different things, such as making transactions and paying for stuff. Some even give you the right to vote on upcoming changes and important details about the project itself. In order to purchase these tokens, there are decentralized exchanges that you can use, if the project you chose to invest in is not a decentralized exchange in itself.

Generally, there is also an option to stake your cryptocurrencies and earn rewards. When you have already acquired some cryptocurrencies that you plan on holding for a long period of time, you can earn interest rates on them by staking. Since most of the DeFi tokens are working on proof-of-stake protocols, they need cryptocurrencies to be staked on the blockchain for transaction verification and completion. For this, people who stake their cryptocurrencies are paid interest on their staked tokens. There are plenty of DeFi staking pools that you can join, or you can even stake independently, but for this, you would need a relatively large number of tokens and an extensive understanding of blockchain and how staking works.

Another way to earn interest on your cryptocurrencies is to provide liquidity. Since decentralized exchanges are not as large as centralized ones, they need to have some level of liquidity in order to guarantee the smooth operation of their platform. So, if you want to earn interest on your tokens, you can stake them on a platform for liquidity purposes. The rewards might be paid out in the form of the cryptocurrency that you staked, or you might be given the native cryptocurrency of the exchange you are staking on as your reward. These native tokens can then be traded just like regular cryptocurrencies and can offer some benefits on the exchange of their origin. But when doing so it is important to have a good risk to reward ratio, as there is a possibility that your staked tokens lose value, and earned rewards might not be enough to cover the losses suffered.

Lastly, you can lend out your cryptocurrencies. There are platforms where you can list the cryptocurrencies you want to lend out and in what percentage you are lending them out. Then, someone who is looking for crypto can borrow from you and pay interest on these borrowed funds. When doing so, you need to make sure that the platform you are using has some sort of safety mechanism that will guarantee that your funds will be returned to you.

Manage your portfolio

Since cryptocurrencies are highly volatile assets and some cryptocurrencies can lose a lot of value in a short period of time, it is important to manage your portfolio and constantly update it unless you are holding for long-term gains. It is greatly advised that you never invest in just one crypto asset and always have your portfolio diversified through multiple tokens. With this diversified portfolio, you can then remove and add cryptocurrencies based on current market conditions and in accordance with your long and short-term views on each token.

The best way to manage your portfolio is to use special tools designed for it, or at least have an Excel spreadsheet or something similar where you can track important information. Each crypto should have a certain weight in the portfolio, with more reliable cryptos holding the majority portion. Using these management tools you can easily balance out your investment portfolio from time to time, you can also easily track entry and current prices and plot some exit goals, all while keeping an eye on the overall performance of your investment.

Should we invest in DeFi?

Now that you know what DeFi is and how to make investments in this field, you might still be asking yourself if it is worth investing in, to begin with. The answer to this question will come down to the personal preferences and beliefs of each individual. If you are someone that believes in the future of cryptocurrencies and in the way that they will be able to bring decentralization to traditional finances or at least grow to a certain level where it will no longer be in the shadow of traditional finance, investing in DeFi will be a good decision to make.

But one thing that any smart investor will tell you is that you should only invest an amount of money you are ready to lose. Since cryptocurrencies are highly volatile assets, your investments can lose a big chunk of value in a very short period of time. Because of this, only invest an amount of money that will bring ruin to you in case of a loss, and always diversify your investment across different cryptocurrencies.

If you are someone who is not interested in cryptocurrencies to that extent and just wants to simply interact with them and make good profits from their volatility, then simply trading on a brokers platform will be sufficient for you, as investing in DeFi requires a person to learn a lot about crypto and blockchain technology.

FAQs on how to invest in DeFi

How can I buy DeFi?

If you want to buy a DeFi cryptocurrency, the first thing you need to do is to choose which token you want to buy. There are many different DeFi cryptocurrencies on the market, each designed for specific purposes by different developers. Once you have chosen the currency you want, you can buy them from centralized exchanges, or if you already possess some cryptocurrencies, you can visit decentralized exchanges and exchange tokens there. There are also options to buy from the seller directly, but in this case, you need to make sure that the transaction is secure and that there is no way for you to be scammed, as the crypto space is full of scammers who are trying to take advantage of the anonymity associated with DeFi.

Should I buy DeFi crypto?

If you are interested in cryptocurrencies and blockchain technology, then investing in DeFi is a good decision to make. Since you will be interacting with blockchain directly, you will be able to learn a lot about cryptocurrencies and how blockchains work. But when doing so, you need to make sure that you have thought everything through as you should not invest in DeFi based solely on gut feeling. But, if you are someone who is not interested in how cryptocurrencies work and are more interested in making profits, simply trading with them will be more beneficial.