Whether you're new to Compound Investing, thinking of getting back in, or just want a refresher on why invest in Compound — this article is for you.
Compound is one of the pioneer decentralized finance protocols. It was one of the first projects to introduce yield farming. There are multiple reasons why you should invest in Compound now.
Below we cover 10 major reasons why you should invest in Compound and why COMP investing can be so powerful. First, let's start with the hard fact-based reasons to invest in Compound and then we'll transition into some less discussed, but still important, reasons to invest.
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However, before getting into the investment aspect of it, it is important to understand how Compound works.
How Compound Works
Compound is an autonomous interest rates system. Simply put, it is a protocol that uses smart contracts to connect lenders and borrowers. A lender on the compound platform is anyone who wants to give out their tokens for interest payments. On the other hand, a borrower is anyone who posts crypto collateral to borrow more crypto on the Compound protocol.
The compound token is the one that is used to pay interest to lenders. The amount of interest that investors earn is entirely dependent on the prevailing market liquidity. In times of high market liquidity, the amount of interest that investors earn drops. That’s because with more investors in the market competition is higher. It’s pretty much like any other market. When the supply of a product (in this case lenders) rises relative to the demand, prices tend to drop.
The reverse is also true. In terms of low liquidity, interest rates shoot up. That’s because the liquidity is lower than what is on demand. As such, prices rise to reflect this reality.
An interesting aspect of Compound is that its loans are taken out in other cryptos, and not just Compound. This flexibility is one of the factors that make Compound one of the top DeFi projects in the market.
Besides taking multiple assets as collateral, there are many other reasons why it makes sense to buy Compound today. Here are our top reasons.
10 Reasons Why You Should Invest in Compound
There are all kinds of reasons why you might want to invest in COMP — probably some you’ve never considered. Here are ten that we found.
1. Compound is an Open Lending Environment
This is probably one of the best reasons to invest in Compound. Unlike in a traditional lending environment, Compound does not require credit background checks on the borrower for them to access financing.
Ideally, this may seem like a risk, but in reality, it’s not. That’s because the user is supposed to overcollaterize. This means one borrows an amount that is less than the collateral they are providing. This eliminates the need to do a background check on the borrower as the bank would do.
It also means that borrowers can get pretty much any amount they need from a few dollars worth of credit to millions. This is a big deal because it gives millions of people who might not access credit in the legacy banking system access to much-needed liquidity. There are billions of them on this planet, and as more people understand the power of decentralized finance, Compound and other DeFi projects will grow exponentially.
The growth of compound in the lending space also stems from the fact that it leverages crypto as an asset. At this point, no bank would take crypto as an asset as collateral for a loan. This means anyone who has crypto and wants some money would have to liquidate their holdings first before getting a loan from a bank. They would also have to prove that they have a reliable income.
Compound, and pretty much all DeFi projects close this gap that exists in the legacy banking system. As with every other innovation that serves a gap in the market, this will be a huge source of growth for Compound in the long run. It is a good reason to invest in compound today, since it’s still early days for DeFi, and the market opportunity is huge.
2. Compound allows Crypto Users to Earn a Passive Income
Besides the ability to borrow on Compound, the project also allows crypto holders to earn a passive income on their crypto holdings. This means the project has opened up a new way for crypto investors to make money, besides speculating on prices.
One of the biggest aspects of crypto passive income applies to Bitcoin. There are many Bitcoin whales who do not wish to never sell their holdings. Unfortunately, this means they are missing out on new innovations that are coming up in the crypto space.
Compound solved this problem for them. Through Compound, a Bitcoin HODLer can earn a passive income without liquidating their BTC. Compound allows them to take part in DeFi through Wrapped Bitcoin (WBTC). This is an ERC-20 token that represents the amount of Bitcoin that a HODLER wishes to put in DeFi.
This ease of access to DeFi for Bitcoin holders is a big deal for Compound. That’s because it unlocks a huge deal of liquidity on the protocol. Bitcoin being the largest crypto has a large community of investors. As such, by allowing them to unlock value from their coins, Compound is miles ahead of other DeFi projects. That’s a good enough reason to invest in this project with the future in mind.
3. Compound is Autonomous
One of the strongest aspects of Compound is that it is autonomous. This means no single party can manipulate how the system operates. Its autonomous nature has a number of benefits to investors besides the low risk of manipulation.
Compound maintains security through smart contract audits that are made by multiple third-party players. Some of the agencies that carry out audits on the Compound Protocol are Trails of Bits, and Open Zeppelin. From their various audits of the network, they have proven that Compound’s code is good, and can comfortably handle all the demands that come with this network.
This is a big deal because smart contract integrity is what holds DeFi projects together. Without it, there would be a chance of investors losing their assets to hackers. Since this is one of the core functions of DeFi, security in a fully autonomous environment is a factor that will play a major role in the long term growth of this project.
Compound protocol allows for interoperability. This means it can be integrated into pretty much any other platform or asset. The protocol also allows for the use of API’s that allow for an even better user experience.
Its autonomous protocol coupled with its interoperability has led lots of platforms to build upon it. There are lots of innovative third-party tools that work in favor of Compound users.
Given that third-party tools enhance the user experience on Compound, they are adding value to the protocol. As a consequence, they will serve to bring in more users to the Compound protocol. This underpins Compound’s potential for long-term growth in value. It also makes it one of the most practical cryptocurrencies to invest in today.
4. Compound has a Strong Team Behind it
The strength and long-term prospects of any cryptocurrency are as good as the team behind it. The stronger the team, the higher the chances that the crypto will succeed. In the case of Compound, the team behind it is pretty solid. For context, the whole team behind Compound is well-known in crypto circles, and that in itself is a confidence boost to anyone looking to invest in the project.
One of the most famous members of the team is Geoffrey Hayes. Hayes is Compound’s Chief Technology Officer and was at one time a maintainer at Ethereum. Hayes is also involved in a number of other crypto projects that are equally successful. Every other member of the team is equally competent.
5. Compound is Cornering the Money Market Segment of DeFi
One of Compound’s greatest strengths is lending. Traders have been taking advantage of it to access more crypto for trading. It is pretty similar to how leveraged trading on crypto platforms like Bitfinex, Binance, Bitmex and others. The difference is that with Compound, traders are borrowing from a decentralized environment, and that’s advantageous.
For starters, when borrowing on Compound, you are doing so on-chain. This means, other than the speculative risk of trading, assets are safe. That’s not the case with centralized exchanges. While you can access leverage on a centralized exchange, you are doing so off-chain.
As such, if the exchange is ever hacked, you stand the risk of losing all your assets. This is a factor that has been drawing in more investors towards decentralized finance platforms like Compound.
Essentially, the vulnerabilities that come with centralized exchanges are an opportunity for the long-term growth of Compound. If the history of exchange hacks or rogue owners disappearing with investor funds is anything to go by, then Compound’s long-term prospects are pretty good.
Even with the decentralized finance space, Compound has an edge over most peer-to-peer lending platforms. That’s because most of those protocols have high interest rates, and matching borrowers and lenders is a tedious process
Compound does not have such problems. It is affordable, matches borrowers and lenders instantly, and it is very easy for one to withdraw their assets.
All this points to a scenario where Compound will keep growing its share of the decentralized money market. As its share of this market grows, so will the value of the COMP token.
This quite naturally makes Compound a good project to buy today. It has more chances of long-term value appreciation than most crypto projects in the market today.
6. Compound is Pretty Easy to Use
For someone new to crypto, DeFi may feel like a pretty complex concept to understand. Some DeFi projects are a little difficult to navigate, but not Compound.
The first step is to download a web 3.0 wallet that is compatible with Compound. One of the most commonly used by investors is Metamask. There are many others you can choose like the Coinbase wallet.
Once you have the wallet ready, you need to connect it to the Compound network and mint your cTokens.
With your tokens ready, the next step is to select an asset that you would like to unlock and enable it.
After your assets are enabled, the next step is to choose whatever you want to do with them. You can either lend or borrow against them depending on your goals. You will also have access to the various farming pools, and their APRs. These should guide you on what where to borrow, or where to lend your assets for maximum returns.
This ease of use coupled with its multiple advantages to users places Compound in a good position for long-term growth. It is a project that makes sense to buy now with long-term value appreciation in mind.
7. Compound is Pretty Easy to Buy and Store
How easily accessible a cryptocurrency is plays a role in its liquidity, and value growth. A crypto with good fundamentals, but only available on a few small exchanges may struggle in value appreciation. This explains why cryptos tend to rally on days when they get listed on major exchanges such as Coinbase and Binance. Investors know that the accessibility to a wider audience will have a positive effect on the price long term.
On this front, Compound is a pretty solid cryptocurrency. It is listed on pretty much all major exchanges ranging from Binance, Coinbase to Kraken.
Then there is the issue of storage. In crypto, there is an unwritten rule that unless you own the private keys, you don’t own the assets. That’s because if you leave them in an exchange, and it gets hacked, then you would lose access. Remember this is an unregulated market, and there is little authorities can do when an exchange goes offline.
For this reason, cryptos that do not have functional wallets tend to only be used for speculative trading. This adds to the price volatility and may be a disincentive for big investors.
Compound does not have this problem. Besides the fact that you can buy it on all major exchanges, you can also store it on the major hardware wallets. For instance, you can store it on the Ledger Nano, which is one of the best hardware wallets in the market. This makes it pretty good crypto for HODLERs looking into the DeFi market long term.
It also makes it one of the cryptos with a good future ahead, in terms of price stability and growth. Therefore, buying Compound at current prices makes a lot of sense.
8. Compound is a DeFi Pioneer
Being first in any market comes with its advantages, and one of them is investor trust. For context, Bitcoin may not be the fastest or most affordable crypto to use, but it dominates the market. The main reason for its success is that it was the first-ever successful cryptocurrency to hit the market.
Compound has a similar reputation in DeFi space. It was the first project to come up with the concept of yield farming. This instantly made it a darling to many crypto investors and the momentum has not changed.
As the DeFi space expands, Compound is one of the projects that continue to record significant user numbers. It has earned that trust, just like Bitcoin in the overall market.
This momentum is unlikely to change because there is an incentive to keep investing in Compound. Besides being first, Compound gives the opportunity to make some easy money through lending, and yield farming. Compound is also well known as one of the safest DeFi projects in the market.
This aspect to the project makes it a good idea to buy COMP now and hold long-term.
9. Compound Has a Relatively Low Supply
The supply of a cryptocurrency is a major factor in its long-term value appreciation. The lower the supply, the higher the chances of value appreciation. That’s because investor demand is usually chasing a very small number of coins. On this front, Compound is a pretty good project. At the moment, Compound has a circulating supply of 5,217,330.35 tokens. The maximum supply of the token is capped at 10 million tokens.
This is quite a low supply compared to most cryptos in the market. For context, Bitcoin has a capped supply of 21 million, and a circulating supply of 18.7 million coins.
If the price of Bitcoin is anything to go by, then Compound has pretty good upside potential. That’s because it has a much lower supply, and is currently trading at just over $300 a token.
The best part is that there are lots of factors at play that could push its price much higher. One of them is the growing adoption of DeFi. The decentralized finance space is one of the fastest-growing in the crypto space. This is evident in the fast growth in the amount that is locked up in DeFi. According to data aggregator DeFi Pulse, the amount locked stands at $59.77 billion up from around a billion dollars a year ago.
Big money investors such as Peter Thiel are also taking an interest in DeFi. All this points to growth, and as a pioneer DeFi project, Compound is at the center of it all. It’s quite naturally one of the positions positioned for growth in this space. This makes it quite a good project to buy now and hold for the future.
10. Compound Holders Take Part in the Project Governance
Being able to vote on the direction of a project is important for any investor. It gives you an opportunity to take part in the direction of the project. In the case of Compound, the COMP token plays a role in how the project is governed.
The project is designed in such a way that only investors with more than 1% of the token supply can make a decision on its governance. Those who hold the token can also delegate their right to vote to any other investor of their choice.
Since Compound is such an important part of DeFi, investors will always want to be part of its governance structure. This means that demand for its token will always be there. Given how low its supply is, the governance aspect to it could play a huge role in its long term price momentum. This makes it quite a practical crypto to buy now and hold. Besides, it’s quite low for anyone of relatively average means to accumulate over 1% of the tokens.
Accumulating 1% of the tokens would give you an opportunity to both decide on its future direction, while also enjoying its speculative value growth.
Clearly, there is every reason to invest in Compound today. From a speculative perspective, Compound’s low nominal value means it has a lot of room for growth. For comparison, its adoption is growing exponentially, while its total supply is about half that of Bitcoin.
Compound is currently the 47th largest cryptocurrency by market capitalization. It has a market capitalization of $2.1 billion. The current circulating supply of Compound is 5,220,695.50. This represents 52% of the total token supply.
The project’s long term growth is anchored on a number of factors, outside of its coin supply. One of them is the rapid expansion of DeFi space. In the last one year, the amount of money locked in DeFi has grown exponentially.
At the start of the year, the amount locked in DeFi stood at around a billion dollars. This amount has since shot up to over $74 billion before stabilizing at around $54 billion presently.
The growing value locked in DeFi is a major indicator of the direction the market is taking. Then there is the fact that institutional players are coming into DeFi. For a project like Compound that is a top player in DeFi, the overall growth of DeFi is a positive factor to its long term growth.
It’s a reason to invest in this project now, with the next couple of months, and years in mind.
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