Cryptocurrency into action: Opportunities and risks of an alternative to traditional investment markets
What new directions, besides just buying and selling, are now available to investors
Last week, the value of bitcoin rose to $25,000, the highest it has been in six months.
As a result, alternative investments in cryptocurrencies and the decentralized finance (DeFi) market are becoming increasingly popular as more and more people look for ways to make their money work better.
Decentralized finance (DeFi) is a new financial system built on blockchain technology that allows the creation of open, decentralized, and untrusted financial products and services, with rules governed by written code. It offers the opportunity to earn money using various tools, such as lending protocols, margin protocols, liquidity mining pools, and staking, which provide a more accessible and profitable way for the average investor to grow their wealth with less risk.
Ruslan Kolodiazhny, CTO at the British fintech company Wirex and Head of Wirex R&D, has told Mind what you need to know about investing in cryptocurrencies.
The world of finance is changing rapidly, and traditional investment options are no longer the only rules of the game. Traditional investment instruments, such as savings accounts, stocks and funds, have long been the main options for most investors in countries with developed financial systems. However, these options turned out to be insufficient to provide a good return on investment compared to the risks in the markets and increasing inflation, especially in the current economic environment.
Banks offer low interest rates on savings accounts, and traditional investment funds tend to take most of the profits for themselves, leaving little for the average investor.
It makes it almost impossible for the average person to build a portfolio that generates enough income to grow it and earn additional money. Moreover, any financial institution can suddenly block your money without any explanation, and you will most likely never see it again.
Because of all these restrictions, many people find it difficult to make money on their investments. They are at a greater risk of losing everything due to market conditions, inadequate corporate governance, strange compliance rules, hacking, fraud, and many factors that are common to traditional investments.
It has led to a growing interest in alternative investments, such as cryptocurrency and decentralized finance, as they offer higher returns on investment with less risk.
Disadvantages of traditional investment markets
Many investors turn to traditional markets, such as deposit accounts and stocks, because of a sense of false certainty, but the returns on these investments are often low, and the risks are high. This is especially true in the current economic environment, when the stock market is subject to high levels of uncertainty and volatility.
Traditional ways to grow money through investments have too low return compared to the same risk of bankruptcy of the central body (bank or financial company) that holds your money.
Investing in stocks and shares today has the same level of risk versus return as the most secure instruments on the cryptocurrency market, or even riskier in terms of return than Bitcoin, Ethereum, and other blue chips cryptocurrencies. We can discuss the reasons for this separately, but the truth is that traditional investments are no longer the Holy Grail.
Opportunities for investors in crypto assets have significantly expanded
On the other hand, decentralized finance offers investors a number of new opportunities that are not available in traditional markets. One of the most popular options is the use of stablecoins – cryptocurrencies that are pegged to the value of the US dollar or other traditional currency.
It is important to understand that today, investing in cryptocurrencies and blockchain or alternative investment instruments is not just about high-risk cryptocurrency trading or investing in fake projects with only landing pages.
There are better strategies using stablecoins, synthetic assets, and many others. It means that investors can get a much higher return on their money without being exposed to the volatility of cryptocurrencies such as Bitcoin, Ethereum, and others.
Another popular option is lending and borrowing protocols, which allow investors to lend their assets to borrowers and earn interest on them. It is a much less risky option than trading cryptocurrencies and can provide a higher return on investment.
Investors can also participate in liquidity mining and staking pools, which are ways to make money from their digital assets. These options are not only less risky than traditional investments, but also more profitable.
It is important to note that alternative investments in digital assets and decentralized protocols still require additional education for people to start using them.
An effective strategy is to create an alternative investment portfolio in addition to the traditional one
The best strategy for investors right now is to stop looking at traditional investments as "the only option worth considering" and build a portfolio of alternative investments. Alternative investments are investments in instruments and markets created by decentralized financial protocols, not just in cryptocurrencies themselves.
The list of the most reliable and profitable alternative investment instruments includes staking, liquidity mining, borrower lending, liquid staking, protocol-based investment strategies, as well as low- and medium-risk investment strategies brought from traditional markets where cryptocurrency assets are already available.
What impresses everyone is that alternative investments are available to everyone without restrictions. Given the current trends in investing, this issue is becoming increasingly relevant in emerging markets where traditional investment instruments are not as developed or available as in the US, EU, and UK.
Therefore, it is important to consider alternative investments as a way to make more money on your investments or diversify your portfolio and increase your chances of achieving financial freedom.
Risks also need to be considered
Alternative investments involving digital assets carry the same or lesser risks than traditional investments due to some factors:
- In digital assets, you are in control of your money.
- The feeling that the state guarantees any investment (e.g., bank deposits, government bonds) is false, as the main risk of these types of investments and inflation decrease any returns.
- Digital assets and instruments have already proven to be sustainable, and there are protocols that are successfully being used by institutional investors. In addition, they provide an instant return on your money.
- However, these types of investments involving digital assets and decentralized protocols still need more education to get people to start using them.
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