Before you invest in cryptocurrency, ask yourself: What financial goals are you trying to achieve? What experience do you have? What budget do you have for investing?
There are many ways to invest in cryptocurrency, and none of them are completely right or wrong.
Sooo let's take a look at some of the most popular types of investors:
These types of investors prefer long-term investment strategies, not cashing out anytime soon. They are prepared for ups and downs, bearish and bullish market cycles. Beginners and experienced investors alike can use this type of investment strategy. All it requires is a firm belief in the long-term success of the project in which you have decided to invest your money.
The main problem with this strategy is that you might miss the opportunity to sell your "moon bag" for maximum profit at the right time, believing that you need to hold on to it a little longer to make a profit.
Simply put, you regularly buy cryptocurrency at the lowest price and sell it at the highest. But in practice, it's not that simple. First of all, it is a job that requires full commitment, as you need to constantly observe and analyze the market to determine when it is the right time to buy and sell.
It is very important to study the market and previous price levels of the crypto-assets you are going to invest in before opening any trade. One of the rules here is also to diversify your portfolio so that you can offset your losses with a profitable trade, and the right risk-reward strategy is key here. We'll cover the topic of diversifying your portfolio later.
The Early Investor
Investors who use this approach invest their money in a project when it is still in the early stages of development or immediately after launch. Some participate in pre-sales on sites such as BINANCE Launchpad or DXsale, where they invest their money with the opportunity to become some of the first participants and currency holders.
This strategy is probably the most unreliable; it can be both very profitable and extremely risky. Sure, you can invest in some projects that will bring in a lot of X's in the future, but you also run the risk of wasting your money because there is a good chance that the project could be unsuccessful, overpriced or simply fraudulent.
So you should definitely do your research before signing up for an ICO or IDO: research the team behind the project, their background; determine if they have previous projects and experience; research their tokenomics, etc.
Read the white-paper and decide for yourself whether you understand what the project does and whether you think it is viable and promising. In other words, with this strategy, it is vital to do the basic research first.
Consider options from the DeFi space
Who says that crypto investing always equals buying only digital currencies? There are quite a few different options from the DeFi space that may seem attractive to investors. Again, as with mixing several types of crypto investing to maximize potential returns, you can also mix the various options available from DeFi and traditional forms of investing, such as buying cryptocurrencies. So, let's take a look at them:
Income farming
Income farming refers to earning interest on cryptocurrency by placing assets on dapps such as DEXes. To earn interest or other cryptocurrencies through income farming, investors must lock in their digital assets for a certain period of time, and these assets act as liquidity for lending, borrowing and trading.
Income farming has a lot in common with steaking, but there is a significant difference - in steaking you can become a validator, while in income farming there is no such option.
The process of steaking, similar to crop farming, involves "locking up" your crypto-assets so that they can be used to validate transactions and support the blockchain network, and in return you receive a reward or interest. Stacking can only be used with cryptocurrencies that use the proof-of-stake (PoS) method (such as Cardano or Solana).
Stacking is probably the most affordable way for crypto investors to earn interest, as this option can be found on most major crypto exchanges.
Liquidity Mining
Liquidity mining should be seen as a form of farming, where users provide liquidity to DeFi applications by putting their cryptocurrency into a pool for other users to use and being rewarded for doing so. For example, in terms of DEXes, liquidity farming means that users (or liquidity providers) supply both assets to the market of a given trading pair so that the protocol can execute trades. A pool usually consists of a trading pair (e.g., ETH/USDT). As a miner (or liquidity provider), an investor can contribute either asset to the pool. The more liquidity providers contribute to the liquidity pool, the larger share of the reward they will receive.
The main difference with income farming is that liquidity providers are compensated from the platform's own coins in addition to the commission income, and, unlike income farming, users do not offer crypto-assets to liquidity pools for lending or borrowing purposes.
Each of these options may share common features, but they differ in accessibility and initial barrier.
Stacking, because it is used as the primary confirmation method for a large number of PoS cryptocurrencies, is available almost everywhere, from large centralized exchanges such as Binance and COINBASE to numerous stacking platforms such as Quint, MyContainer, Zengo and so on.
Since you don't need a lot of funds, and you can do staking on CEX, staking is by far the most affordable and probably the easiest way to make passive income. However, if you want to become a validator, you must be prepared to both invest a significant amount of money (e.g., 32 ETH in Ethereum) and be responsible for the technical issues that investors will have to deal with on their own.
In income farming, investors also bet on their digital assets, but they can only do so on DeFi platforms like Sushi swap or Pancake swap.
Unlike betting, where you are sometimes required to lock in your assets for a certain period of time, in income farming you can swap pools on a weekly basis to really maximize your potential returns.
As you can see, income farming can be more profitable because it allows for more flexibility in your investments; however, it has a higher barrier to entry than steaking because you have to be familiar with the DeFi space and especially with DEX and how they work.
Moreover, since you can only engage in liquidity mining in the DeFi space, you may face risks such as exit fraud, smart contract exploits, security risks, and so on.
As mentioned above, liquidity mining is similar to crop farming, and the main difference is the reward: investors typically get their own blockchain token as a reward, plus they have a chance to earn management tokens.
In general, most DeFi platforms reward their liquidity providers based on the ratio of their contributions to the liquidity pool. Providers with larger contributions are generally rewarded with more tokens, which compensates them for the risk they take. In addition, liquidity providers are typically rewarded with management tokens that can be used to vote on development proposals and critical protocol changes.
Liquidity mining is no more complicated than staking, and investors can become LPs even with small amounts of funds. However, investors who choose to become liquidity providers face some significant risks in addition to those faced by income farmers, namely the risk of temporary losses.
Since liquidity mining locks your funds for a certain period of time, investors can face significant losses if the price of their tokens drops dramatically while they are still locked into the liquidity pool.
Thus, the liquidity provided by the investor may become worthless at the time of withdrawal compared to when he or she placed it in the pool. This situation is called a non-permanent loss because it can only be realized when the liquidity provider decides to withdraw the tokens at a discounted price.
Soo, in this article, we looked at the three main types of crypto investors, which determine how to invest your money in a particular project. I also talked about the main ways of investing from the DeFi space. I hope that this information was useful for you and will help you to understand in which direction you would like to work with the crypto market.
In the second part of this article, I will go into more detail about the basic principles of proper diversification of your portfolio. We will consider market capitalization, risk levels and possible asset scenarios.
