Here’s Why Bitcoin and DeFi Need an Investment Plan
Every investment requires a plan. The Bitcoin and DeFi markets are reaching new all-time highs every day. A crypto investment plan is important now more than ever. But do you need one for the roller coaster cryptocurrency markets? In this post, we explain the importance of an investment plan for the Bitcoin and DeFi markets.
What is a Crypto Investment Plan?
An investment plan answers a few simple questions. These questions are at the center of your investment. This plan works for any kind of investing, from bonds to crypto.
To build an investment plan you have to answer a few kinds of questions. The questions are related to the types of assets you have, the goals of these assets, the duration of investment, and if or when to make a change. It is essential to have this all figured out before you invest.
What assets are growth assets and what are income assets? A growth-based asset is an asset which you’d hold for the long term. This is under the assumption that its value will increase in time. An income-based asset gives you a regular income – dividends, interest, rent.
What is the risk diversification? An investment plan should be based on your risk appetite.
What are the long-term and short-term assets? An investment plan should have assets and investments with different durations to match risk, goals, and needs.
When should you alter the investment plan? An investment plan should have alerts to alter, augment, or adapt your investment strategy.
Do Bitcoin and DeFi need an investment plan?
Investment plans work for all kinds of assets. The cryptocurrency markets are different from regular markets. It would be prudent to have an investment plan for digital assets investment.
The crypto markets are volatile, regulation differs by geographies, and new coins are introduced frequently. Digital assets investments, whether they are Bitcoin, other cryptocurrencies, DeFi tokens, and NFTs, need to be understood. But before the very assets themselves, it’s important to understand the underlying infrastructure. Concepts like blockchain technology, private keys, digital wallets, stablecoins, oracles, and more, are the building blocks of a crypto investment plan. We’ve got videos and blog posts breaking them down.
Building a crypto investment plan for your personal investment is important. The markets are new and the learning process never stops. It’s easy to get confused in this fast-paced market. A crypto investment plan will give you perspective and keep you level-headed.
Themes of crypto investment plans
A crypto investment plan should fit your needs based on your goals, risk appetite, duration, and alterations. We are not here to tell you what your plan should be…only you can tailor it. However, we’ve listed a few ‘themes’ on which cryptocurrency investment plans can be based.
Bitcoin investment plan
Many crypto investment plans rely on investing in Bitcoin. Bitcoin is the first and original cryptocurrency making up 60% of the total market. This plan does not indulge in the DeFi markets or other cryptocurrencies. It is purely themed on Bitcoin.
Bitcoin as a store of value
Bitcoin has a hard cap of 21 million. As of this writing, around 18.6 million BTC are already produced. A narrative driving the Bitcoin investment theme is the limited nature of the cryptocurrency. This means an asset that is limited will be valuable with time. Especially measured against an asset that is unlimited. The unlimited asset is fiat currency, like the US dollar, the Euro, or the Indian rupee.
With inflation possibly rising due to increased fiat creation (especially because of the Covid-19 pandemic) this theme is strengthened. This is why fund managers like Paul Tudor Jones, Cathie Wood, Stanley Druckenmiller, and Bill Miller bought crypto in the last year. We’ve explained why big investors and big companies are buying Bitcoin here.
The ‘store of value’ narrative can be used only for cryptocurrencies that have a limited supply (eg. Litecoin, Chainlink, Binance Coin, etc.). Cryptocurrencies like Ethereum, USD Coin, DAI, and more do not have a pre-decided fixed supply. However, the themes given below do apply to them.
Dollar-cost averaging is a systematic way to buy an asset. This means buying a certain amount of an asset at a certain time interval. This can be buying ‘X’ amount of a stock, bond, or crypto every week, month or year. The purpose of this is to average out volatility. With a price rise, you buy less and with a price fall, you buy more of the asset at the same amount.
An investment plan can have price targets for its assets. This can be set while forming the investment plan. This is set to ease the investor to not alter the plan until the price target is met. Alterations can mean buying more, maintaining the investment, or selling. Once again, if the price target and the alterations are set, outside noise is easier to ignore.
DeFi investment plan
Defi assets can also have a crypto investment plan. These assets provide additional financial functionality beyond just investing. For instance, you can lend and borrow assets, participate in trade financing, liquidity pools, and more.
A DeFi investment plan can either be based on DeFi protocols, DeFi tokens, or a combination of the two.
DeFi protocols reimagine traditional financial functions using blockchain technology and digital assets. Participating in these protocols can achieve various goals – leveraging, earning yield, diversification of risk, participating in emerging crypto markets. Your investment plan can either participate in several functions.
For instance, lending protocols like Maker, Compound, and Aave allow lending and borrowing of cryptocurrencies and stablecoins. Decentralized exchanges like Uniswap and Curve Finance allow earning yield through ‘yield farming’ or participating in liquidity generation. Diversification through real-world assets can be done through derivatives on Synthetix.
You as the investor can pick the DeFi function you’d want to participate in. This can be based on your goal, risk, duration, and degree of change.
DeFi tokens’ are governance or value accrual tokens for their restive protocols. Their protocols’ volume and value locked determine the token’s price. A DeFi investment plan can be based directly on DeFi tokens or DeFi protocols.
As part of your investment plan, you can study several DeFi tokens like Aave (AAVE), Maker (MKR), Compound (COMP), or Uniswap (UNI). Find out what drives their use. This is what’ll drive the price. Invest in these DeFi tokens if it fits your plan.
Everyone needs a plan – Bitcoin or DeFi
The evolving crypto market requires a plan. We aren’t here to tell you what that plan is or what it should include. An investment plan will help you make better decisions, understand investment themes and drown out unnecessary noise. Most importantly, an investment plan will tell you why you’re investing, how long to stay invested, and what really matters in your investment. These are questions only you can answer.
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