For several months, DeFi tokens have brought investors multiple profits, and DeFi platforms promise users thousands of percent per annum for opening a deposit. We tell you how to choose a project with good potential and reduce the risk of losing all your money
The cryptocurrency market provides opportunities to make money every day. Some of them are conservative, for example, trading on bitcoin rate fluctuations, the value of which can be about 10% per day. Other options offer both significantly higher income and significant risks.
High leverage trading and options
One of the surest ways to earn hundreds of percent on one trade, or lose everything on it, is to trade with leverage. Many exchanges and derivative platforms such as Bitmex, Binance Futures, OKEx and others allow clients to borrow funds against the security of their assets. Loan size and risks are determined by a coefficient, the value of which starts from 1 and reaches 100, in rare cases exceeding this value.
It works as follows. A trader temporarily gives the exchange, say, 1 ruble as collateral and, having chosen a leverage with a coefficient of 100, receives 100 rubles in return. They are used to automatically buy cryptocurrency. If its price rises by 1%, the user receives 100% of the profit. If the asset becomes 1% cheaper, the platform closes the deal and takes both the issued funds and the collateral.
Private trader Alexander Boyarintsev spoke about another way of earning money. He proposed an option with the purchase of call options for a cryptocurrency. These are contracts that give the right to buy an asset under predetermined conditions. The price of such contracts may fall if the volatility of the asset rate decreases, this will make the conclusion of the transaction more profitable.
“Example: Bitcoin price was $ 9,500. Volatility dropped and options with a strike of $ 11,000 and a two-week expiration date were worth $ 60. I bought 3 options. Then the BTC price went above $ 11,000. Accordingly, everything above this price turned into profit. The risk was $ 180 – $ 60 for each option. The total profit is $ 3000, "Boyarintsev explained.
Investing in DeFi Tokens
Another sure way to multiply capital at times or nullify it is investing in cryptocurrencies from the field of decentralized finance (DeFi). In 2020, this sector is experiencing a boom stage. Many DeFi tokens that did not yet exist in June-July grew by thousands of percent in August. The most striking example is the Yearn Finance (YFI) platform token. It was released on July 18 and cost $ 32 at the time. In September, the price of YFI rose by more than 130,000%, to $ 44,000, now it has dropped to $ 22,000.
There are many such examples. Unitrade token (TRADE), which appeared on August 5, went from $ 0.11 to $ 2.6, but then fell in price to $ 1. The UMA (UMA) coin, issued at the end of April, showed an increase from $ 0.3 to $ 25, now it costs $ 12.5. The price of Ocean Protocol (OCEAN) cryptocurrency for the same period grew from $ 0.03 to $ 0.62, now it has dropped to $ 0.32.
There has been a hype around the DeFi sphere, so even one successful purchase of a DeFi token can multiply the investment. But the chances of losing on this are much higher than the chances of luck. Firstly, now there are a lot of decentralized projects, especially when compared with the beginning of summer. Therefore, user capital, which was previously allocated to a limited number of assets, now accounts for thousands of projects.
Secondly, along with the hype, scammers came into this area. And the allegedly DeFi tokens issued by them are much larger than the real projects. After the incredible rise in the price of YFI, many users decided that they should try to buy DeFi coins as early as possible, before the masses knew about it. In this regard, there is a demand for services that allow the first to know about the release of a new DeFi token.
Most of these coins first appear on the Uniswap exchange. Services such as Astrotools.io or Dextools.io allow you to monitor in real time how new projects are added to the site. On the one hand, it enables traders to buy coins as soon as they appear, in the hope of multiple growth.
On the other hand, there is no strict listing procedure on Uniswap. Anyone can issue a token and add it to this exchange. In this regard, fraudsters take advantage of the traders' hunt for new projects and try to "slip" their coins, which have absolutely nothing behind them. This is probably why, according to Astrotools.io and Dextools.io, new cryptocurrencies appear on Uniswap literally every 5 minutes. Often, it's not even humans who do it. Scammers create special programs that automatically issue tokens and add them to Uniswap and other decentralized exchanges.
The value of risk and possible income from the hunt for new DeFi projects is demonstrated by the example of the HotDog token. It was released on September 2 and went up in price from $ 5 to $ 6200 within 24 hours, and then dropped to almost zero within a few minutes. Another example is the SAVE coin. On September 14, its rate soared by more than 500%, to $ 5,000, after the creator of YFI spoke about the project on his Twitter account. The very next day SAVE cost about $ 300.
There are several criteria that increase the likelihood of selecting a token with good potential. The first is limited emissions. The lower this indicator of an asset, the higher its price can be. For example, a key factor in the growth of the YFI rate was the fact that there are a total of 30 thousand tokens. But the issue itself does not guarantee a rise in the price of the cryptocurrency. On the contrary, many fraudulent projects issue coins with an issue of exactly 30 thousand in order to make inexperienced traders believe that this is the new YFI.
The second is product availability. If the project has released any application or platform, as its polarity grows, more and more users will learn about this coin. This makes it likely that it will rise in price in the future.
The availability of the product also increases the chances of the token being added to the marketplaces. This is the third and probably the most important criterion for selecting DeFi projects. After listing on exchanges, DeFi coins are showing explosive growth. Reasons: more users get the opportunity to invest in cryptocurrency, and the addition to the exchange gives more reasons to assume that the project is not a dummy.
However, it is usually too late to buy DeFi tokens after they have been added to large platforms. Typically, listings on Coinbase, Binance and other industry giants coincide with the peak price of such coins. Therefore, the chance to make money on investing in DeFi tokens is higher if you buy them after they appear on small trading floors in the expectation that market leaders will pay attention to them.
The DeFi sphere offers another way of making risky money – “profitable farming”. It works as follows. The user makes a deposit to the platform in cryptocurrency, for example, Ethereum. A percentage is paid on this deposit, but in another cryptocurrency – in the native tokens of the project. In this way, "the farmer reaps the harvest." The resulting coins can then be sold to lock in profits.
"Profitable farming" is now very popular. The reason is sometimes insane rates on deposits. In the early days of DeFi, platforms often offer returns in the thousands of percent per annum. For example, the Spaghetti Money project in the first day of operation allowed users to receive up to 35,000% per annum in bitcoin. Sushiswap project – over 2000%. And these are normal indicators for the sector.
Such rates are suspicious. Indeed, there are a number of nuances. First, the amount of profitability depends on the number of users – the more there are, the fewer tokens will fall on one “farmer”.
Second, the price of the "harvest" coin plays a key role. As a rule, the price is high on the first day after the launch of the application. But as soon as users start receiving payments, they sell tokens and their value drops. This has a corresponding effect on the rates on deposits.
Third, most DeFi platforms launch without going through a code audit. This means that the protocol can operate with a critical vulnerability, and there is a risk for users to lose funds. For example, on August 12, the Yam platform began to work, on the first day, users contributed more than $ 500 million in cryptocurrency to it. The next day, the project developer reported an error in the code. Within half an hour after that, the price of the Yam token fell from $ 167 to $ 1.
Third, scammers. They come up with various ways to deceive users and steal their funds. One example is that the platform code contains an extremely high commission for withdrawing funds. Let's say that to deposit cryptocurrency for "harvesting", you need to pay $ 30-50, and to withdraw – more than $ 1000. Another example is that attackers, luring users with high rates, can try to sell them their tokens, which have no intrinsic value.
Fourth, a lack of understanding of how “profitable farming” works. On September 11, a user described how he lost $ 5,000. He poured funds into the platform to receive 300% of the income per year when he deposits in Ethereum. However, he later decided to change the plan to another, more profitable one.
The Kimbap project offered a 1000% yield if the platform's native token was used for farming. The user bought it for $ 5000 and made a deposit. The next day, the price of the coin fell more than 100 times. Such an outcome was to be expected, as in this coin other traders “harvested” and sold it to realize the profit.
Fourth, not only the project token can fall in price, but also Ethereum itself or any other cryptocurrency used as a deposit. You also need to consider commissions. The cost of one transaction on the ETH network, due to the rapid growth in the popularity of the DeFi sphere, has increased tenfold since the beginning of the summer – up to $ 6-10. Even more expensive has become the implementation of smart contracts, the use of which is necessary for farming – $ 30-50.
The rise in commissions has presented farmers with a difficult choice. On the one hand, they need to allocate a fairly large amount for this strategy in order to reduce the share of the commission. Only one deposit / withdrawal of funds can lose about $ 100. On the other hand, in order to receive significant income, you need to deposit funds on the platform in the first days of its launch. And doing this with unverified, unaudited projects is extremely risky.
On September 13, former product manager at analyst firm Messari Qiao Wang called DeFi tokens "the investment opportunity of the decade." He believes that not taking this chance is like not buying Bitcoin in 2013 or Ethereum in 2015. However, there is a lot of garbage in this industry, so it is extremely important to choose projects that develop a real product and have a fundamental basis for growth.