How blockchain technology is changing the way people invest
Over a decade after the release of the 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 compared to traditional finance.
It is easier for investors to buy into cryptocurrency compared to traditional assets. Anyone can download a free Bitcoin (BTC) or multi-crypto wallet and sign up for one of the many cryptocurrency exchanges available. Many exchanges still do not require users to verify their identity, while others only require ID verification when certain thresholds are reached.
Compare this to buying shares, where almost all platforms have Know Your Customer (KYC) procedures that users must complete before buying their first share. On top of this, users can only buy shares from publicly traded companies and cannot own 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 funding.
In traditional markets, only accredited investors and high net worth individuals are usually allowed to participate. In contrast, seed stage funding in crypto projects can allow anyone with a wallet to participate. Everything is 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 far beyond what is possible in other asset classes. Unlike stock market investors who can analyze quarterly reports written by a self-reporting company, a crypto investor without permission can dig into the data of a decentralized protocol’s performance and track key figures in real time or on a historical basis.”
Musighi went on to say, “The openness of communication between a crypto project’s core contributors among themselves and with the wider community is also light years ahead of the way listed companies operate. Access to accurate and thorough information is key to investing and I believe it is night and day when comparing crypto to any other asset class.”
Due to the lack of centralization and lower entry barriers 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 mainly due to the lack of access to affordable traditional financial services in the country. Cryptocurrency is a simpler and more accessible alternative to traditional financial (TradFi) services. TradFi usually comes with restrictions and bureaucracy that make it different for the average joe to participate.
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 can attract younger investors who may not meet the requirements to participate in traditional finance.
Musighi, believes that younger investors are more inclined towards 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 understand ease the concept of cryptocurrency. It’s no surprise that the digital generation is more attracted to digital money.”
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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 been playing the stock and commodity 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 make money in the crypto space
Cryptocurrency is not only easier for investors to access and provides more opportunities for investors to make money. There are various sub-sectors within the crypto market, including token sales and decentralized finance (DeFi).
Token sales were one of the first sub-sectors to rise in popularity within the crypto space. Token sales are fundraising rounds where investors can buy a crypto project’s initial tokens before they hit the open market. The idea is that investors can “get in early” and make money 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 various forms, including:
The ICO market first peaked in popularity, surpassing the $1 billion mark in 2017. ICOs and their newer iterations (IEOs, IDOs, IGOs, etc.) were attractive to investors since they were initially very easy to get into, with users only needing 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 is still relatively easier for users to get involved in token sales than TradFi token sales. First-time issues, for example, have stricter requirements. Some platforms also require investors to have at least $250,000 in their account or 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 area, including yield farming – a process where liquidity is provided to DEXs in exchange for rewards in a project’s original token, crypto lending and lending platforms and stakes, which enable investors to earn interest on crypto . assets locked to a specific network.
Such platforms usually require investors to have a personal wallet where they control the private keys. Investors must connect this wallet to a protocol they will use. 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 perform 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 makes it possible to access standard financial products via DeFi. The platform works via containers called cubes, which are 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 various protocols, including interest rate betting, algorithmic 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 even though DeFi requires users to be more hands-on with their investments, there are still protocols that can handle specific tasks via smart contracts. Contrast this with 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 provides an opportunity for a higher downside as well. For example, this year alone, many cryptocurrencies, including 72 of the top 100 coins, fell over 90% during the most recent market downturn.
While the reason for this high volatility may not be known, experts have speculated that it could be due to factors such as a 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 UK tend to see cryptocurrency as a “get rich quick” scheme, according to a study covered by Cointelegraph in 2019. Many respondents to the study lacked an understanding of cryptocurrencies and were more likely to invest. without due diligence.
Speaking to Cointelegraph about volatility in the crypto space, Ellie Le Rest, CEO of Colony – an Avalanche ecosystem accelerator – said:
“We believe volatility is a good thing, simply because it drew profit-seeking investors into the market and will 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 being deceived by fraudulent projects in space. For example, over $1 billion worth of crypto was lost to fraudsters in 2021, according to a report covered by Cointelegraph. The same report noted that nearly half of all crypto-related fraud came from social media platforms.
“It’s still early days for DeFi, so there’s a lot of risk involved. Hacks and exploits have cost billions of dollars. To make DeFi a safe and attractive tool for new investors, DeFi industry players must prioritize user protection and increased security as a top priority .” says Lederman and continues:
“That said, when you understand the risks involved and properly adjust for those risks, DeFi can open up a new world of opportunities for young crypto investors rather than centralized lenders or legacy financial institutions.”
Findings further show that many investors do not research the coins or projects they invest in. Instead, they tend to follow recommendations from social media or YouTube influencers with hopes of getting rich. Despite this, there are still many knowledgeable investors in the area. For example, in March of this year, many investors followed their favorite projects and profited when their original tokens rose in value after major announcements. This process is known as “buying the rumor and selling the news.” Investors can gain insight 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 barriers to entry due to less bureaucracy and regulation in the space. Investors also have more control over their funds since they do not need to rely on a broker or intermediary 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.
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The downsides for investors include a higher chance of losses due to user error, fraud and hacking in the space. However, one of the biggest downsides is the volatility of the crypto market in general, with big upsides usually followed by big downsides.
Investors have an easier path towards building wealth through cryptocurrency as it is much easier to get into than traditional finance. However, investors must still perform due diligence on the projects they intend to invest in and risk only the money they can afford to lose.
