March 28, 2024

CEX.IO company blog | How to Invest in the DeFi Sector Correctly?

Yuri Mazur, head of the data analysis department at CEX.IO Broker, shared with RBC his opinion on how to distributeinvestments in the sector of decentralized finance

Bearish markets returned to crypto markets on April 23mood. Bitcoin was unable to maintain the $ 50,000 mark, so the risk of further correction in the main digital asset is increasing. Despite the general decline in digital currencies, now is a good time to reassess your investment portfolio and invest in the DeFi sector.

Our investment idea is to createa diversified portfolio of projects within individual backbone subsectors of the DeFi ecosystem. The idea assumes a medium-term or long-term investment horizon, that is, investments for a period of more than 6 months. You can get a diversified exposure in DeFi by distributing funds between the following areas:

— Blockchain
— Decentralized exchange
— Project of credits and loans
— Platform for decentralized derivatives.

How to choose a project

The selection of portfolio projects is based onfinding undervalued assets. Below we offer an example and logic for forming such a portfolio. In the blockchain segment, the most successful projects are Ethereum and Binance Smart Chain. This is evidenced by the TVL (Total Value Locked) indicator, which means the total value of funds contributed by users to projects built on the blockchain. For Ethereum and Binance Smart Chain, the TVL is $68 billion and $25 billion, respectively, while their capitalization is $290 billion and $87 billion.

Having decided with the blockchain, all we have to do is add a decentralized exchange, decentralized loans and decentralized derivatives.

Here you must adhere to the rule thatprojects on the same blockchain should not overlap in our portfolio. To identify undervalued assets, we will continue to use the market cap to TVL ratio as a benchmark. By comparing decentralized exchanges, we found that Balancer has a low market cap / TVL in the group, which indicates that it is undervalued.

Thus, traders and investors cananalyze DeFi assets, comparing market capitalization and TVL, and based on the data obtained, form your portfolio from the most promising, but not overlapping projects.

The risks

The formed portfolio isconcentrated exposure to the DeFi sector, which already carries a significant risk. This idea needs to be seen in the context of the investor's complete portfolio, his level of understanding of the crypto industry and willingness to take risks. Accordingly, depending on the level of conservatism / aggressiveness of the investor, the share of DeFi in his portfolio should also change.

Investing in DeFi is inappropriate in our opinionfor beginners. We estimate the risk level of the idea as “above average”, but the expected return, however, is also above average. To reduce the risk of a negative scenario, the portfolio can be further diversified and the most logical thing would probably be the addition of an insurance project, for example, Nexus Mutual. This is due to the fact that with the growth of DeFi, the demand for capital protection will only grow. Adding an insurance project to a portfolio can protect an investor from developing the opposite scenario.

Read the full material here.

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