By Abhishek Bajaj
Over the last few years, advances in blockchain technology have generated massive interest in cryptocurrencies and in the potential of Decentralized Finance, also known as ‘DeFi’. As crypto gains momentum, we see a naturally growing demand for reliable investment options in the DeFi space.
To cater to this demand, investment firms and hedge fund managers are expanding their services into a whole new sector – ‘Crypto Asset Management’. Moreover, due to the inclusive nature of this space, more and more people are also trying their hand at starting crypto funds. The most exciting of them is the new-age crypto specialists, fashionably known as ‘DeFi-Heads’!
But even though there is a lot of excitement in this space, there is also a severe lack of understanding of cryptocurrency and the underlying principles of blockchain technology. As a result of this general ignorance, investing in crypto and DeFi becomes challenging, and perhaps even dangerous! In order to avoid a bad experience, there are some unique subtleties of this space that asset managers need to consider. Note that the basic principles of traditional asset management (such as trend analysis) apply even in the crypto space. However, it is essential to know the following factors in order to stay safe from risks and to gain an edge over the market!
- Understanding Flow-of-money: Cryptocurrencies show some strong correlations with worldwide events and not seeing the bigger picture will lead to skewed strategies. Crypto markets are affected by multiple features such as regulatory decisions and large-scale adoption (such as by Tesla or El Salvador). Even within the crypto space, we see a strong correlation between Bitcoin prices and the rest of the market (known as the ‘Alt market’). Therefore, understand what are the pivots of price movement and capitalize on relevant changes. In crypto, if you can assess the flow of money, you can predict the market like a stack of dominoes!
2. Tokenomics Study: The beauty of cryptocurrencies is that the inner mechanisms that drive value are fully visible to everyone. Study the tokenomics and revenue models before investing in a crypto token. The supply and demand of a cryptocurrency are heavily dependent on its tokenomics framework and utility. Grasping this core relation between token price and structure can reveal hidden alpha!
3. Community Participation: The crypto community is a unique space where the top industry leaders freely exchange knowledge and interact with the masses. Leveraging the advice of expert investors and DeFi savants can accelerate your own growth and understanding of the crypto space. Twitter, Medium, Youtube, and other social media platforms are your best friend! Interact, network, and study with the top managers and technicians. Remember that a crypto ecosystem is a socio-financial machine, and skipping the social part is not advised!
4. Risk management: Cryptocurrencies are possibly the most volatile asset on the planet! Protect your capital first and seek profits later. A strategy that includes downside protection, stop-loss, and take-profit policies will be able to survive the strong crypto bear markets and flourish during bull cycles. Make decisions solely based on strategy and not emotion! While these principles are common in traditional markets, they are all the more imperative to a successful crypto strategy.
5. Secure your crypto: While most managers focus on their strategies, few focus on the technical side of managing their assets. Crypto is very vulnerable to phishing, hacking and exploits. Always secure your crypto in hardware wallets or in custodial services. DO NOT click any links you are not sure of, and don’t trust anyone offering
any free or discounted services. Cybersecurity is perhaps the least appreciated principle for crypto asset managers but it is possibly the most important!
The author is the co-founder, DeFiVerse