The DeFi Hype Is Gone – The Real Opportunities Remain
Decentralized finance (DeFi) continues to evolve, even in a Crypto Winter. Generating yield is enabled by opportunities such as staking and various Web3 protocols. Still, it requires careful research and evaluation due to volatility and inherent risks, such as hacks and exploits. DeFi remains a key proponent of the crypto economy and infrastructure.
In 2020, we saw the initial DeFi craze, with many small, unknown projects taking off simply by leveraging the term “DeFi”. If a project was said to offer some type of DeFi service, it was automatically sent to the moon. This was obviously unsustainable, especially since many of these projects did not even have an actual fully operational product.
As expected, the DeFi Winter arrived, only to bring with it the collapse of both great and small DeFi projects. DeFi was soon labeled speculative hype, prompting many to second-guess their investments. I, on the other hand, believed that a second DeFi season was soon on the way. I did address this in my writings as I waited for the sector to bottom out. I became rather adventurous once I saw the market approaching a bottom.
What The Second Wave Of DeFi Actually Taught Us
We have subsequently seen a great run for DeFi projects over the past year or so. However, with the recent market collapse, many DeFi projects have been significantly hurt. Even the more widely used and loved projects, such as CAKE, have taken a serious knock. Capitalizing on a strong DeFi Season is crucial for long-term survival and profitability.
The upside of being exposed to DeFi is that new income is generated through farming rewards. However, if the applicable tokens are losing significant value, newly received coins or tokens do not really help much. In the long term, it can be great, provided the project reaches previous highs. This is an important observation, as many DeFi projects battle to regain strength.
The DeFi Effect: The Shift Most People Don’t Fully Understand
Unfortunately, many DeFi tokens initially rocket, only to dump and never quite reach their previous highs again. Hacks and exploits also have a devastating effect. The protocols that are unfortunate enough to suffer an attack never really recover. It really is a high-risk area of crypto, regardless of the gains on hand. This is always a very real risk that potential investors need to consider.
Outside of the risks, if you manage to time your moves, DeFi can be very rewarding, but you have to be quick. Another important factor here is to take profits often. Furthermore, seek out projects that are not merely created for yield farming but are actual projects providing a needed service. This is imperative! Visit this article about utilizing DeFi as an exit strategy.
DeFi Rewards The Strategic – Not The Impulsive
DeFi is not really an idea for the more passive investor, as an active strategic approach is really best. Consolidating profits and waiting for a new entry are critical parts of a successful approach. It is very much like surfing or even day trading. However, gains can be lost very quickly in the pump-and-dump schemes often seen in DeFi. This volatility is typically much more pronounced than that experienced in the crypto market as a whole.
The Hidden Risk In DeFi: Why It’s More Speculative Than You Think
If you think BTC is volatile and speculative, then DeFi might shock you if you are new to the sector. More stable DeFi heavyweights might be a consideration for the more passive or traditional investor. The reality, though, is that much of the DeFi market is still quite speculative, with tons of “fly-by-nights” entering the space. Many of these projects crash and burn extremely fast.
Identifying and isolating quality in this niche is much more challenging than it is elsewhere in the space. There are many opportunities, but not without risk, and even the most well-informed cannot predict the future. Furthermore, even a quality project can fall prey to an exploit. Unfortunately, the sector still requires time to mature and strengthen.
My Thoughts Going Forward: What I’m Watching In DeFi Next
Recent regulatory issues have made it almost impossible for me to use DeFi for the time being. More clarity is expected later this year. So, for the moment, it doesn’t really affect me too much, regardless of what transpires in the world of DeFi. However, I do believe certain projects will continue to do relatively well, provided the market does not head south again.
There are also many decent projects that have been overly punished. I would expect many of these to begin a “healing” process. This is provided the market plays along. There are also many that will just fizzle out slowly, regardless of whether the market continues higher. Many of these projects are simply opportunistic in nature and offer no long-term prospects or community growth.
A Shift I’m Personally Sensing In Crypto (And Why It Matters)
Apart from a small allocation to riskier investments, I sense a general shift toward quality. This applies to DeFi, as well as the broader crypto market. Bearing in mind that true wealth in crypto is generated by investing in micro-cap gems before they are recognized by the market. This is obviously speculative, and I personally allocate in this direction, but the majority of my holdings are blue chips.
However, they were not necessarily top projects when I bought them. Purchasing a small allocation, say 1% of your portfolio, will cause that weighting to change if the project experiences a significant price explosion. There is a lot of junk in DeFi that can make you a quick buck, but you definitely would not consider holding it long term. It is these projects that I have been avoiding of late. They exist in many sectors, not only DeFi.
Final Thoughts
The earlier you are in your journey, the more risk you require to gain some serious traction. Wealth is created by embracing risk, while wealth is preserved by avoiding it. I am personally expecting top DeFi projects to do fairly well this year. Projects such as PancakeSwap are considering introducing exciting updates. Interestingly, CAKE was enjoying a solid trend reversal just as the market tanked a few weeks ago.
Ultimately, a shift toward quality will unfold. This is generally the market’s behavior when price action shifts bearish. It is also the market’s behavior when maturation begins. As I said, there is still a place for speculative trades, but quality projects will become more attractive through 2022 and beyond. These are my thoughts. Thanks for sharing your time. See you soon!