How To Invest In DeFi Coins

Last Updated April 8th 2022
8 Min Read

Decentralized Finance (DeFi) is proving to be one of the simplest ways of generating a passive income. This explains the ongoing DeFi explosion that has sucked in 4+ million crypto investors and seen more than $20 Billion in the different DeFi platforms. Over the last few months, the likes of PWC argue that “DeFi services are set to explode” and change “the way we think about finance” and “the role of traditional banks.”

There is little doubt that DeFi will most likely be the next big thing in crypto. This might have prompted you to think of ways on how to invest in DeFi coins. Or some of the best DeFi crypto to buy in 2022.

In this post, we will be walking you through the process of buying and selling DeFi coins, the pros and cons of investing in DeFi, look at the best DeFi coins to buy in 2022, other ways of investing in DeFi, and tell you if DeFi coins are the suitable investment for you.

How To Buy And Sell DeFi Tokens?

How to invest in DeFi coins image

First off, what is Decentralized Finance (DeFi)?

Decentralized Finance is a general term used to refer to dApps and smart contracts that provide financial services in the crypto-verse. They seek to replace the banks, brokerage, and investment funds. Without the need for an intermediary, they present to you blockchain-based platforms where you can save, lend, invest, and trade crypto assets or even borrow.

Most of these saving, lending, and trading platforms and ecosystems have developed native tokens that facilitate transactions within their networks. These are referred to as DeFi coins and are some of the fastest-growing crypto investment products.

The majority are hosted on the Ethereum network and have been around for a few years now. But they only started making serious headways in 2020 amid a crumbling global economy. 

They played a crucial role in fueling the early 2021 crypto market bull run. And by the time it peaked in November, the total value of crypto assets locked in different DeFi platforms had exceeded $110 Billion - according to DeFi Pulse.

Even with a contracting crypto market, the DeFi niche continues to prove its resilience, with top DeFi coins posting impressive gains. Some like Luna and AVAX of the Terra and Avalanche DeFi ecosystems, for instance, have joined the pack of top 10 most valuable coins with market caps exceeding $40 and $25 Billion, respectively.

So, how and where can you DeFi tokens in 2022?

How To Buy DeFi Tokens

The process of buying DeFi coins is relatively easy and straightforward. Here is a step-by-step breakdown of how to buy DeFi coins: 

Step 1: Identify the best DeFi coin to buy

As is the case with virtually any other investment, traditional or digital, start with identifying the most promising DeFi coin. 

There are many factors that you have to consider when searching for the best DeFi crypto. From community support to tokenomics, the roadmap, and even its utility.

Step 2: Find the marketplace where it is listed

Note that, unlike most cryptocurrencies, DeFi tokens aren’t usually listed with such popular exchanges as Coinbase or Binance. 

In most cases, they are only listed on decentralized marketplaces like Pancakeswap on Binance Smart Chain or Sushiswap on the Ethereum network. Therefore, after identifying the DeFi token, you wish to buy, find the marketplace when it is listed.

Step 3: Have a crypto wallet

Most decentralized marketplaces do not support fiat-to-crypto exchanges. They, therefore, won’t let you buy a DeFi token with USD paid from a debit/credit card. 

Most will only accept specific crypto assets, especially stablecoins like USDT, BUSD, and USDC, as the payment method for the tokens. Therefore, link the marketplace to your crypto wallet to facilitate the payment.

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Step 4: Buy DeFi coin

Specify the amount of DeFi tokens you wish to buy and hit the buy button. The payment will be drawn from the linked wallet and the private keys for the purchased tokens deposited therein.

Don't Miss: What Top 10 DeFi Cryptocurrencies Will Explode In 2022?

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Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.

How To Sell DeFi Tokens?

Whether you are a short-term trader or a long-term investor, you will eventually need to dispose of the tokens to acquire the income realized from their value gain. This is how you go about selling DeFi tokens:

Step 1: Start by logging back to the crypto marketplace where you bought the DeFi tokens.

Step 2: Create a sell order. Note that most of these decentralized exchanges will allow you to sell it at the prevailing market rate or add it to the order book when you open a limit order.

Step 3: The marketplace will sell the tokens on your behalf and deposit the earned crypto in the linked crypto wallet.

Other Ways Of Investing In DeFi Coins

While buying and selling is the most common form of investing in DeFi coins, it isn’t the only one. Neither is it the most lucrative, especially when you consider the highly volatile nature of DeFi token prices and the unpredictability of the larger crypto market.

There are several other ways through which you can invest DeFi tokens. They include:

1. Staking

Staking is the act of pledging your cryptocurrency to a blockchain that uses a proof-of-stake consensus mechanism to verify and validate transactions on its network. By staking crypto assets, you earn a chance to verify transactions and create blocks for the network. In exchange for this service, the blockchain network rewards with free tokens. 

Here is an example: Avalanche is a leading proof of stake blockchain and one of the most valuable DeFi ecosystems. To become a validator on this network, you will need to stake a minimum of 2000 AVAX tokens (worth $186,000 today). In return, you will earn interest of up to 11% APY on your staked amount.

Staking is available to long term investors. Instead of buying and HODLing all your AVAX tokens in an offline wallet, you could choose to contribute to the security of the Avalanche blockchain by validating transactions and being paid for it.

2. Yield Farming

Yield farming involves locking your purchased DeFi coins in a third-party smart contract that lends them out to other investors and traders while paying maximum interest. It is a high-reward/high-risk investment strategy that involves lending protocols and a mushrooming number of finance-focused decentralized Apps.

The two most popular Yield Farming platforms for DeFi investors are Maker and Aave. These are the largest collateralized crypto lending platforms that let you earn interest when you lend your DeFi crypto to other crypto users. 

Today, Maker and Aave have a combined $29 Billion worth of crypto locked in their platforms and pay variable but highly competitive interest on your crypto investments.

Like staking, Yield farming is a viable option for long-term DeFi coin investors. Instead of HODLing your crypto in an offline wallet, DeFi coins let you invest in these yield farming projects and generate double income. First, when the DeFi token value rises and from lending interest.

3. Liquidity Mining

Liquidity mining is an investment strategy in the DeFi niche that involves contributing liquidity to lending protocols and decentralized exchanges and getting paid for it. Since most of these protocols and DEXs cannot access traditional liquidity from banks, they ask crypto investors to lock in digital assets in the ecosystem to facilitate lending or crypto exchange.

In return, these ecosystems share the lending interest or fee paid by the crypto traders on their DEX with these liquidity providers. In most cases, the reward will be in the form of a predetermined third-party crypto asset or the platform’s native token.

Good examples of liquidity mining platforms are the Uniswap and Sushiswap decentralized exchanges. They let you contribute different cryptocurrencies to different liquidity pools and earn highly competitive rewards.

What Are The Pros And Cons Of Investing In DeFi Coins?

Pros

✅ Generate passive income: Most investment strategies in the DeFi ecosystem are passive income generators.  

✅ Earn double income: By buying and holding onto DeFi tokens and engaging in one other alternative investing method with the coins, e.g. staking, you earn doubly from this DeFi investment.

✅ Multiple income streams: From day trading, staking, yield farming, liquidity mining, and even HODLing, there are multiple ways of making money with DeFi coins.

✅ Massive potential to grow: Many investors, like Mark Cuban, believe the explosive growth witnessed in the DeFi scene is the beginning of what’s to come. They expect both the industry and value of DeFi tokens to grow exponentially over the next few years.

Cons

❌ Cyberthreats and fraud: In 2021 alone, Chainalysis reports that DeFi investors lost more than $7.8 Billion to cybercriminals like hackers and through such crypto scams as rug pulls, pyramid/Ponzi schemes, and phishing.

❌ Volatility: DeFi token prices are massively volatile and sensitive to negative news and sentiments. It, therefore, is not surprising for a DeFi coin’s value to crash by double-digit percentages in a few hours and take months to recover.

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Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.

Are DeFi Tokens The Right Investment For You?

Yes, DeFi tokens are for you if you are looking to grow your crypto portfolio exponentially. They are also the right investment for you if you are looking for the perfect passive income generator or looking to expand your crypto income generating streams.

It also is for you if you wish to actively contribute to the advancement of the crypto space because staking lets you play an active role in sustaining your favourite crypto project.

All you need to get started is to learn how to invest in DeFi coins by going through this post, finding the best DeFi coins to buy, and purchasing them at your preferred DeFi marketplace. 

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Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.

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