How blockchain technology is changing the way people invest
Over a decade after the release genesis block on the Bitcoin network, blockchain technology has changed how people invest their money, with many platforms in the crypto space having much more relaxed requirements for investors when compared to traditional finance.
It’s easier for investors to buy into cryptocurrency when compared to traditional assets. Anybody can download a free Bitcoin (BTC) or multi-crypto wallet and sign up for one of the many available cryptocurrency exchanges. Many exchanges still don’t require users to verify their identity, while others only require ID verification once certain limits have been reached.
Compare this to buying stocks, where almost every platform has Know Your Customer (KYC) procedures that users must complete before buying their first stock. On top of this, users can only buy stocks from publicly listed companies and cannot own any shares from a private company.
On the other hand, crypto investors can invest in tokens that public or private companies have created. Investors in the crypto space can also participate in early-stage funding rounds, including seed stage funding.
In traditional markets, usually only accredited investors and high-net-worth individuals are allowed to participate. In contrast, seed-stage funding in crypto projects can allow anyone with a wallet to take part. It’s all at the discretion of the founding team. Jeremy Musighi, head of growth at Balancer — an automated portfolio manager and trading platform on Ethereum — told Cointelegraph:
“Crypto investors have access to a level of transparency that goes way beyond what’s possible in other asset classes. In contrast to stock market investors who can analyze quarterly reports written by a self-reporting company, a crypto investor can permissionlessly dig into data on a decentralized protocol’s performance and track key metrics in real-time or on a historical basis.”
Musighi continued to say, “The transparency of communication between a crypto project’s core contributors amongst themselves and with the wider community is also lightyears ahead of the way publicly traded companies operate. Access to accurate and thorough information is key to investing and I think that’s night and day when comparing crypto to any other asset class.”
Due to the lack of centralization and lower barriers to entry for crypto investors, the industry has seen a lot of popularity in developing countries. In Nigeria, for example, 35% of the population aged 18 to 60 (33.4 million people) have owned or traded crypto this year, with 52% (17.36 million) holding half of their assets in crypto. This is due mainly to the lack of access to affordable traditional financial services in the nation. Cryptocurrency is an easier and more widely accessible alternative to traditional financial (TradFi) services. TradFi usually comes with restrictions and red tape that make it different for the average joe to partake in.
Cryptocurrency has also attracted younger investors into the space, with competition between friends and family being one of the driving factors behind this. Unfortunately, many of these young investors mistakenly believe that the crypto market is regulated, despite its low barrier to entry. Easier access to financial tools may attract younger investors who may not meet the requirements to participate in traditional finance.
Musighi, believes that younger investors are more inclined toward cryptocurrency since they have grown up around technology, saying, “Younger investors are more tech-native; they spend more time online, they recognize the value of digital assets more naturally, and they more easily grasp the concept of cryptocurrency. It’s no surprise that the digital generation is more attracted to digital money.”
Misha Lederman, director of communications at Klever — a decentralized crypto wallet — told Cointelegraph, “Anyone with a smartphone and a passion for learning can invest in cryptocurrencies. Wall Street has played the stock market and commodities markets by different rules than Main Street for decades. With Bitcoin and crypto, a new generation of average investors is able to participate, compete and accumulate early and fairly in the most exciting industry of our time.”
How investors are making money in the crypto space
Cryptocurrency isn’t just easier for investors to access and provides multiple avenues for investors to make money. There are different sub-sectors within the crypto market, including token sales and decentralized finance (DeFi).
Token sales were one of the first sub-sectors to increase in popularity within the crypto space. Token sales are fundraising rounds where investors can buy a crypto project’s native tokens before they hit the open market. The idea is that investors can “get in early” and make a profit once the tokens are listed. This is due to the expectation that a token’s price will increase after a listing due to speculation and increased liquidity.
Token sales come in different forms, including:
The ICO market first peaked in popularity, surpassing the $1 billion mark in 2017. ICOs and the newer iterations (IEOs, IDOs, IGOs, etc.) were attractive to investors since they were initially very easy to get into, with users needing only a crypto wallet to participate. Now, however, there are additional requirements such as KYC (for IEOs), whitelists and limits on how much investors can contribute to a crowdsale.
Regardless of these new requirements, it’s still relatively easier for users to get involved in token sales than TradFi token sales. Initial public offerings, for example, have tighter requirements. Also, some platforms require investors to have at least $250,000 in their account or to have traded three times before they are eligible.
DeFi is another sector in the crypto space that has attracted a lot of investor interest. This is because the sector has many protocols within the space, including yield farming — a process where liquidity is provided to DEXs in exchange for rewards in a project’s native token, crypto lending and borrowing platforms and staking, which enables investors to earn interest on crypto assets locked into a particular network.
Such platforms usually require investors to have a personal noncustodial wallet where they control the private keys. Investors need to connect this wallet to a protocol they’ll be using. For example, many investors use MetaMask to connect to DEXs and other platforms when engaging in DeFi. Users then interact with protocols directly with their related smart contracts to carry staking, liquidity farming or lending/borrowing.
Decentralized finance has given investors more control over their finances than TradFi, where users normally have an asset manager or broker to handle the processes. However, some protocols automate specific processes within the DeFi sector.
HyperDex, for example, is a platform that enables standard financial products to be accessed via DeFi. The platform works via containers called cubes, similar to liquidity pools on DEXs. Smart contracts power these cubes, and users can choose a cube according to their preferences. In addition, they can engage in different protocols, including fixed income staking, algorithm trading and race trading, a protocol similar to prediction markets.
Yearn.Finance is another platform that uses smart contracts, in this case, to automate the process of yield farming. The smart contracts automatically switch liquidity pools based on which one has the highest payout. So, while DeFi does require users to be more hands-on with their investments, there are still protocols that can handle particular tasks via smart contracts. Contrast this to traditional finance, where a third party would be required to handle tasks instead of automated smart contracts that keep the user close to the protocol and their holdings.
Volatility is a double-edged sword
Volatility is another factor in the crypto market that has affected how people invest their money. Since cryptocurrencies are much more volatile than traditional assets, investors can expect much higher returns. For example, the average return in the stock market is 10% annually.
Conversely, cryptocurrency investors have seen anywhere from 50% in a month with blue chip coins like Ether (ETH) to 100% in a day with memecoins like Dogecoin (DOGE). However, increased volatility brings a possibility of a higher downside, too. For example, this year alone, many cryptocurrencies, including 72 of the top 100 coins, dropped over 90% during the recent market downturn.
While the cause of this high volatility may not be known, experts have speculated that it could be due to factors such as lack of regulation and a low amount of institutional money in the space.
Regardless of the reason for the high volatility, many investors have tried to capitalize on it. For example, many investors in the United Kingdom tend to see cryptocurrency as a “get rich quick” scheme, according to a study covered by Cointelegraph in 2019. Many of the respondents in the study lacked an understanding of cryptocurrencies and were more likely to invest without any due diligence.
Ellie Le Rest, CEO of Colony — an Avalanche ecosystem accelerator — spoke to Cointelegraph about volatility in the crypto space, stating:
“We believe volatility is a good thing, simply because it did draw profit-seeking investors into the marketplace and shall continue to do so. Their presence encourages the development of even more sophisticated protocols and reliable, scalable infrastructure.”
Lack of research by investors has led to many of them getting scammed by fraudulent projects in the space. For example, over $1 billion worth of crypto was lost to scammers in 2021, according to a report covered by Cointelegraph. The same report noted that nearly half of all crypto-related scams came from social media platforms.
“It is still early days for DeFi, so it entails a lot of risks. Hacks and exploits have cost billions of dollars. In order to make DeFi a safe and attractive tool for new investors, DeFi industry players need to prioritize user protection and increased security as a top priority.” says Lederman, continuing:
“That being said, when understanding the risks involved and properly adjusting for those risks, then DeFi can open up a new world of opportunities for young crypto investors in place of centralized lenders or legacy financial institutions.”
Findings further show that many investors are not researching the coins or projects they invest in. Instead, they tend to follow recommendations by social media or YouTube influencers with the hopes of striking it rich. Despite this, there are still many savvy investors in the space. For example, in March this year, many investors followed their favorite projects and profited when their native tokens rose in value after large announcements. This process is known as “buying the rumor and selling the news.” Investors can find insights by joining the project community and finding out about future announcements and news.
Pros and cons of the crypto market for investors
The benefits for investors in the crypto space are reduced entry barriers due to less red tape and regulation in the space. Investors also have more control over their funds since they don’t need to rely on a broker or middleman to manage their holdings. Additional benefits include a higher potential for returns through holding and trading crypto and the many protocols within the DeFi sector.
The drawbacks to investors include a higher chance of loss due to user error, scams and hacking in the space. However, one of the biggest downsides is the volatility of the crypto market in general, with huge upsides usually followed by large drawbacks.
Investors have an easier path toward building wealth through cryptocurrency since it is much easier to get into than traditional finance. However, investors still need to perform due diligence on the projects they intend to invest in and risk only the money they can afford to lose.