With Blockchain adoption rapidly reaching a tipping point, investing and trading in cryptocurrency has become a genuine ecosystem in of itself. In a speech at Malta Week 2021, Managing Partner of Beacon 256 David Zou shed light on this emerging sector
What I want to talk about is a new frontier in the investment of decentralized finance as the managing partner of Beacon 256. In recent years, Decentralized finance has almost become synonymous with market volatility.
In an industry that has become stereotyped by outsiders as being hyper-volatile, Zou points out that this perception mainly comes from the media circus that surrounds the sector. With the mainstream media mainly covering either 1,000% gains or 1,000% losses, it naturally follows that what most people see is either explosive growth or catastrophic collapse.
Moving on to DeFi, Zou pointed out that DeFi wasn’t a specific “thing” but rather an umbrella term for Blockchain applications that disrupt financial intermediaries. However, this fear and apprehension surrounding a nascent industry with genuine potential scares off investors that could be pillars of the still growing sector. We can also see the opposite effect where incoming investors, egged on by stories of massive upswings, come into the space with unrealistic expectations of both the money that could be made as well as the timeframe that they could make it in.
Many investors are looking for 10X to 20X returns. Many more investors are trying to time the market to benefit from market upswings, which is largely unsustainable. So think about it yourself. Can the average investor consistently time the market or buy the next 10x coin? Is this a sustainable way of investing that helps make you successful in the long run with DeFi investments?
Zou then proceeds to pour cold water on daydreaming investors hoping to pull off another Shibecoin 2,50,00,000%.
Even market professionals fail to consistently time the market and define the best investments possible. As a result of chasing big gains from single coins, investigators are opening themselves up to tremendous amounts of risk that most investors cannot tolerate, particularly those coming from traditional finance.
In response to this, Zou points potential investors towards one of the oldest and most respected investing tips; Diversify, Diversify, Diversify.
We’ll work to minimize permanent losses of capital and the keyword here is “permanent loss.” I come from a background of traditional finance, where there is a surplus in the variety of asset classes and technical instruments for de-risking such as stock losses, options, calls, puts and so on and so forth. In DeFi, these Trad-Fi or traditional finance instruments already exist. But new tools unique to crypto provide alternatives to diversification and de-risking.
Crypto-Finance 101: Staking and yielding
On that note, he moved towards two novel but heavily underrated tools: staking and yielding. The former refers to the use of making your crypto available through an exchange for use in the proof-of-stake process and earning interest through it. The latter refers to lending crypto to aid in the creation of liquidity wherein rewards are provided to yielders in the form of interest and fees.
As of July 2021, only 24% of proof of stake tokens are actually staked in the market. To put a monetary sum on this as per market capitalizations at that time, that’s over $400 billion that could be generating returns for investors across the globe with lower risks.
Both of these are methods fundamentally idiosyncratic to the Blockchain as staking allows investors to use their own crypto to validate transactions more effectively and efficiently with every new block being added to the chain leading to new coins being minted with the coins being returned back to the investors in the form of rewards. When an investor wants to unstake to readjust their market portfolio, they simply go through a two minute transaction. This also is a tactic that works both during an upswing as well as market downturns since both are the result of a higher volume of transactions that would have their liquidity provided by aforementioned stakers.
You’re fundamentally de-risking yourself against volatility because the more volatile the market is, the more money you can theoretically make with seeking opportunities. Staking large cap alt coins can net anywhere from 5 to 20 percent profit which, if you’re familiar with Decentralized finance, is not a lot. We recommend looking for and investing into up and coming digital assets that can generate substantial returns, which is the true opportunity we have before us today.
Illustrating this point with an example, he noted that early stakers in Shiba swap, a coin a lot of us in the space have heard about, earned over 710% APY. He emphasised that through this, you wouldn’t be adding your own money into the system but rather leaving your existing allocation into a software.
Staking helps validate blocks of transactions while yield farming helps provide DeFi platforms with liquidity. These are two of the many under leveraged return generating opportunities in DeFi that a lot of investors aren’t looking at. The new frontier of DeFi is not a single revolutionary investment that’ll generate you a 100x or 200x returns. The new frontier that we’re suggesting is a diversified crypto portfolio that uses new DeFi tools to adjust for risks, rather than trying to generate unsustainable rates of return.
He concludes the speech with a method that his firm refers to as RDM. The acronym stands for Reduce risks, Diversify your holdings and Minimize your permanent loss of capital. These three priorities would allow investors, even institutional ones, not only avoid irrevocable losses when in a volatile market but allow them to survive and even thrive in this emerging market.
AIBC returns to the United Arab Emirates:
Drawing the leading figures of the emerging tech world to the Middle Eastern metropoles for cutting edge technology, the 2022 AIBC UAE expo plans to unite the policy-makers, developers, C-suite executives, and legal experts of the burgeoning AI and Blockchain sectors. Through three days of educational panels, inspiring keynote speeches, workshops, and networking events, the expo seeks to create the foundation that the Industrial Revolution 4.0 can be built upon. Join us from the 20th to 23rd March 2022, in UAE.