Different types of Investments in the Digital Space

Investors are looking to diversify into something like DeFi, but it does need a little guidance on what are the new investment options in the digital space. Here we are going to discuss the different types of investments in the digital space.

But before we go in head-first, here is a short briefing on what it is that makes DeFi such an intriguing and sought-after asset in the financial world.

What is Defi and Why it should matter to you

 “DeFi” stands for “decentralized finance.” 

DeFi offers financial instruments without relying on intermediaries such as brokerages, exchanges, or banks by using smart contracts on a blockchain. DeFi platforms allow people to lend or borrow funds from others, speculate on price movements on assets using derivatives, trade cryptocurrencies, insure against risks, and earn interest in savings-like accounts. Blockchains are decentralized databases that record transactions and aren’t controlled or managed by any central authority. Hence, they’re decentralized and so are the protocols built on them. 

And that brings us to Smart Contracts/Protocols. “smart contracts” are code-based agreements that contain the details of a transaction — that enable people to trade crypto, lend and borrow crypto coins, participate in liquidity pools, and more. Smart contracts are simply programs stored on a blockchain that run when predetermined conditions are met. 

Why does DeFi matter? 

DeFi sets the stage for a world without traditional brokers. 

Without these gatekeepers policing, processing, and charging fees at every turn; financial transactions become faster, more affordable, more transparent, and best of all more accessible. 

Imagine being able to invest without having to meet a minimum asset threshold. Imagine taking out a loan without doing any of the paperwork. 

DeFi empowers everyday investors to access new asset types, reduce their fees, improve their rates, and all around take more control over crafting their financial future.

“We are in the early stages, with a lot of hype and bubbles around it, just like the internet in the 90’s. DeFi has the potential to eventually reshape our current financial industry.”

If you’re fascinated by all the opportunities DeFi could afford you, you’re off to a good start. The process can actually be quite achievable when you know which steps to take and where to put your money according to your risk and return expectations. Following are some of the best investment options in the digital space :

1. Purchase Crypto Coins

Just like you need cash to invest in stocks, you need crypto coins to participate in DeFi protocols. Your crypto wallet is a digital entity where you’ll store the crypto coins that you’ll use to participate in DeFi protocols. If your wallet is also an exchange, you can purchase crypto there. If not, there are a number of exchanges that make buying crypto simple.

Cryptocurrency trading involves speculating on price movements via a CFD trading account, or buying and selling the underlying coins via an exchange. When you buy cryptocurrencies via an exchange, you purchase the coins themselves. You’ll need to create an exchange account, put up the full value of the asset to open a position, and store the cryptocurrency tokens in your own wallet until you’re ready to sell.

Day trading crypto is one of the most lucrative and easiest ways to make money from the crypto market. Many traders today are learning how to move in and out of the market within a day, and they’ve taken advantage of the volatility in coin prices to profit massively.

Also before investing, one should also be aware of the volatile nature of various cryptocurrencies and potential security, legal, accounting, and tax concerns. Like other commodities, crypto assets are exposed to risks arising from market movement and cyber risks.

The 24h trade volume in the entire crypto market was worth over 500 Billion US Dollars. The global cryptocurrency market size was valued at USD 1.49 Billion in 2020 and is projected to reach USD 4.94 Billion by 2030, growing at a CAGR of 12.8% from 2021 to 2030.

2. Tokenization

A token is a piece of data that stands in for another, more valuable piece of information. Tokens have virtually no value on their own—they are only useful because they represent something bigger.

Tokenization is a solution that divides the ownership of an asset (such as a building) into digital tokens. These tokens act as “shares” and are similar to non-fungible tokens (NFTs). The difference here, however, is that the tokens are fungible, and they are actually tied to the value of the asset.

There are different types of tokens like Utility Tokens, Security Tokens, Payment Tokens, Exchange Tokens, Non-fungible Tokens etc. While crypto coins are essentially digital versions of money, tokens can stand for real assets or deeds. You can buy tokens with coins, but some tokens can carry more value than any of them. 

You can buy tokens which are either attached to fungible assets (eg. 10kg of gold) or Non fungible tokens which are a unique digital asset. Also there are options to stake the tokens which adds to your rewards.

3. Staking 

There are protocols that enable investors to lend crypto, trade crypto, stake (or lock up) crypto for a reward, participate in liquidity pools where you’ll receive earnings when trades are made in your pools, engage in yield farming where your participation in a loan earns you interest, and more.  

You can also team up with other stakers on some protocols to create a staking pool, which allows people to pool their staked crypto and share in the rewards if and when they are chosen to validate blocks on the blockchain. 

There is another process called cold-staking, which involves staked coins being kept in an offline wallet. This only really works when there is a seriously significant amount of virtual cash involved, but it does have the advantage of being much more secure than keeping it in an online wallet. 

There is no “best crypto for staking”. You will need to make sure you are using a blockchain that supports proof-of-stake (for instance, Bitcoin is proof-of-work and does not allow staking). 

Staking is a potential profitable investment option, providing you stake your money in a cryptocurrency whose value does not go down by more than the rewards you will get once you are chosen to add to the blockchain.

Like any other investment, there are certain risks associated with this. Investors should be cautious of these risks like rug pull scheme. A rug pull is a type of crypto scam that occurs when a team pumps their project’s token before disappearing with the funds, leaving their investors with a valueless asset.

As per the recent quarterly reports of “Staked” – the market cap of PoS protocols now accounts for over 50% of crypto’s total market cap, or $594 billion, or just over half of crypto’s total market cap. 

3. Crypto Mining

Bitcoin mining is the process of creating new bitcoins by solving extremely complicated math problems that verify transactions in the currency. When a bitcoin is successfully mined, the miner receives a predetermined amount of bitcoin.

By mining, you can earn cryptocurrency without having to put down money for it. Bitcoin miners receive bitcoin as a reward for completing “blocks” of verified transactions, which are added to the blockchain.

Mining rewards are paid to the miner who discovers a solution to a complex hashing puzzle first, and the probability that a participant will be the one to discover the solution is related to the portion of the network’s total mining power. You need either a graphics processing unit (GPU) or an application-specific integrated circuit (ASIC) in order to set up a mining rig. 

Bitcoin mining difficulty refers to the degree of difficulty involved in discovering new bitcoin blocks through mining. It gets harder and less profitable to mine for bitcoin as algorithm for the bitcoin mining difficulty adjusts.

A miner currently earns 6.25 Bitcoin ($250,000 as of April 2022) for successfully validating a new block on the Bitcoin blockchain.

Even if Bitcoin miners are successful, it’s not clear that their efforts will end up being profitable due to the high upfront costs of equipment and the ongoing electricity costs. The electricity for one ASIC can use the same amount of electricity as half a million PlayStation 3 devices, according to a 2019 report from the Congressional Research Service.

According to latest research, the global Cryptocurrency Mining size is estimated to be USD 4502.4 million in 2026 from USD 4050.5 million in 2020. The global Cryptocurrency Mining market size is expected to grow at a CAGR of 2.7% for the next five years.

4. NFT

NFTs have exploded in popularity during the pandemic, leading many investors to wonder how to buy them. NFT stands for “non-fungible token.” NFTs are used to guarantee ownership of a unique asset — usually a digital asset such as a piece of art, musical composition, or an item within a video game. NFTs are bought and sold via a purpose-built NFT marketplace, These marketplaces can be used to buy an NFT at a fixed price or function as a virtual auction, much like the exchange system for buying and selling cryptocurrencies and stocks. Prices on NFTs listed for sale via auction are therefore volatile, changing in value depending on demand. The higher the demand, the higher the price.

A key difference between NFTs and stocks and cryptos is that stocks and cryptos are fungible — meaning each unit is just like the other. One share of Amazon is the same as another share of Amazon, and one Bitcoin token is equal to another. NFTs are non-fungible, meaning the token you buy represents a unique item not directly replaceable by anything else.

The value of some NFTs has skyrocketed in the past year and  attracted a lot of attention from the investment community. There certainly are some merits to consider when buying and using NFTs:

  • Certain physical collectibles (such as art) have a long track record of appreciating in value, and digital art could exhibit the same price appreciation.
  • Buying and selling digital assets as NFTs yields access to potentially far more buyers and sellers than in the past.
  • “Smart contracts,” meaning a set of coded commands built into the blockchain, can ensure that artists and creators get paid based on the use and resale of their work in the future.

NFTs are in the early days of development. It’s a promising new front in the world of technology, but risks abound when investing in any movement’s nascent stage. Tread lightly as you learn more about NFTs and remember to stay diversified with your investments to limit the risk of any single asset derailing your wealth-building progress.

The non-fungible token (NFT) market size is expected to grow by USD 147.24 billion from 2021 to 2026. The market is anticipated to witness a healthy growth at a CAGR of 35.27% during the period.

5. Metaverse

The metaverse is an entirely new virtual reality ecosystem being built at this very moment. What is so exciting about it is that the future potential is tremendous. Participants in the metaverse have the ability to create their own user-generated content around just about anything they can imagine.

If you thought investing in the real world was complicated, then watch out: investors now need to get their heads around the metaverse, too. Gartner recently named the metaverse one of the top five emerging trends and technologies for 2022. The metaverse market is expected to grow due to diverse applications in gaming, content creation, learning, social interaction, training, and virtual shopping.

Facebook founder Mark Zuckerberg reckons it’s “the next frontier in connecting people”, which is why he rebranded the social media platform as Meta last year.

The Metaverse is now a multi-billion-dollar investment opportunity, and across 2021, mention of the term increased exponentially during board meetings and earnings calls, and investors are taking notice.

The Metaverse has also transformed the economy in two ways – first, by providing an alternative investment instrument by way of blockchain, and second, by opening up new asset classes. All of this translates into a bullish environment with moderate to high risk appetite.

The global metaverse market is expected to grow from USD 45.6 billion in 2020 to USD 344.8 billion by 2027, at a CAGR of 40.1% from 2021 to 2027.

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