When should you buy DeFi tokens?

DeFi tokens are going up! Should I buy (Enter token name) this token? Hey what about that ( abc ) token which pumped up by 1000% in the last few days? What do you think about the DeFi market? Why the heck everyone is talking about DeFi? When should I buy DeFi tokens? Am I missing out?

If you have any of these questions, (or anything similar) maybe this article can help you out a bit!

Disclaimer: This post is not any exclusive financial advice. I'll always insist that you do some research as well on your own before jumping into anything. I can of course help you out and provide my own advice/analysis, (if you contact me on twitter/if you ask in comments) but in the end, the decisions you take are completely up to you.

The other day, I published a post on whether DeFi token are worth the Hype right now.

In short, I think you will be able to clear that out, if you went through the basic introduction of DeFi.
If not, perhaps you can check this nice article which covers about the basics in detail: https://blockgeeks.com/guides/demystifying-defi-ultimate-guide/

Fear of missing out may be returning to the crypto space, after over two years of relative absence. It can be good, as well as bad for a lot of people.

So, if you are a HODLer,what’s the next best thing to HODLing Bitcoin? Perhaps you wont mind earning a little interest on it?

Enter DeFi!

DeFi generates passive returns!

One can lend their Bitcoin(or other cryptos) to a DeFi platform e.g. MakerDAO, and start earning interest on it. But how? Lets have a look at the earnings and then we can conclude: Data source: https://www.tokenterminal.xyz/

Lets take into consideration the traditional financial markets and how they operate.

Unlike the traditional centralized system where the borrowers actually borrow money to create real-world value and repay with interest, the current DeFi system is able to generate return for lenders. But that's not the only way! They can generate returns in the form of Trading fees, from their platforms, They can use the pool of the locked tokens to algorithmically trade and generate returns, Automated Market Maker Protocol, lending, among a ton of other ways. In other words, think of how about traditional stuff like: banks, interests, mutual funds, debt funds and loans.

DeFi is experimental and technically complex

A warning:

DeFi still remains a risky business, especially if you consider the market volatility.
The protocols may have tech vulnerabilities, especially since they are in their infancy with limited possibilities for insurance.
Also, as far as I observed, many tokens are able to generate returns because of the rather random appreciation of price of the cryptocurrencies!

Why is there such Hype about the DeFi platforms and ecosystem?

Because they are trying to bring new products in the market, which will offer what the traditional markets have been offering to us since ages, in a "decentralized, trustless" fashion. You dont need KYC, (which is superb, yet comes with its own set of disadvantages), and the best thing? It is becoming easy to use, as we are getting more and more awareness over time, and also because of the rapid development going on in this space.
The race to liquidity mining is gaining hype, especially as other people started looking for alternative sources of passive income from crypto.
People find it cool to earn interest on their crypto holdings, (Just like they earn interest on their banks/other funds on traditional markets), on a non traditional platform, and also the fact that most of the DeFi platforms are very transparent in nature, and are very much auditable.

The reason why you hear the term, "Bank the unbanked"

Now, lets think about the markets from a different perspective; especially if you want to get into this race of DeFi.

Most of us either think from a "trading perspective", or from an "Investor perspective". How about a mix of both?

Right now we see DeFi Marketcap is surging, so a wise time to enter would be somewhere in the next few months, if you see dips. Patience is the key, I'd say.

They say, "Enter during pullbacks in a trending market"!

Spot the macro trends, if you see a healthy pullback and not some shitcoin-like crash, you can probably enter into these tokens slowly over time.

Now lets look at this from another perspective (Fundamentals) If you look at how DeFi can be valuated, have a look at the P/E model, the similar way, on how we evaluate the traditional stock market assets.

So, from a technical perspective, I think it will be a bit wise to wait for sometime before entering, especially as many tokens are a bit overvalued.

So how do we find out the P/E ratio of DeFi tokens? Before going into the details, we should understand what is this P/E ratio, in case you have not heard about it.

P/E stands for Price to Earnings ratio. This ratio is used in traditional investment products to obtain a snapshot valuation of an asset, and to gain a fundamental insight. In traditional markets, this ratio compares share prices to the underlying earnings of the company.

Capital assets, like stocks, bonds and income-producing real estate, all provide investors with cash flows on future earnings.

A token worth mentioning here: #comp Its gaining hype because: Community interest in COMP since its launch
Certain assets in Compound have higher than average yields Multiple cryptocurrency exchanges have listed COMP.

While Compound has gathered widespread interest, the hype surrounding this token can be overwhelming. It already looks like its in a bubble.

Now if we look at the below image from a tweet, we can see that Compound is generating a revenue of around $4.4 million per year,and that time, the market cap was around $876m. So the Price/Earning ratio is simply Marketcap/Total annualised earnings. Which comes to 200x (which means its very much overvalued) Oh also same for other coins.

But at the same time, if it is able to generate more returns, and up its game from $4.4 million, then the marketcap should also go up because people will speculate on it. (like traditional markets)

And it is still sitting at a market cap of around $590 million, and revenue generated falling around $11,592,902(at the time of writing.) which means, its still pretty much overvalued. Data from: https://www.tokenterminal.xyz/

Reference for the tweet:
https://twitter.com/JulienThevenard/status/1274672432033529857?s=20

A good article about P/E on DeFi can be found here: https://bankless.substack.com/p/are-defi-tokens-worth-buying

Though many people will disagree that fundamentals never work on crypto, I'll personally both agree, as well as disagree with them.

I'll agree because: Market is often too much overhyped, and markets are still driven by how other markets are performing, they are very nascent, and overall, I still feel crypto market is a bit immature, so they are somewhat right. Even in this case, P/E may become unreliable, given the fact how new the DeFi market actually is.
I'll disagree because: We can see how fundamentals are actually working out, and data like the actual usage metrics, the on chain analysis, and other factors do give us some fundamental insight. Of course if you are a bit rational, you wont go ahead and buy up a token if it pumped by some 1000% in a few days, and which actually has very less utility in the real world

I'll cover an article in future about how you can earn passively through DeFi, and also some other cool stuff coming up, so stay tuned

So, will you wait? Or will you buy in!? Or better way, are you going to use DeFi products to leverage on passive earning opportunities? Let us know in the comments below :)

Posted Using LeoFinance