Birdeye Guide: Ways to Diversify Your Web3 Investments
To optimize gains and minimize risk in crypto investments, diversification through different segments of the web3 ecosystem makes major sense. Such a strategy aims to capture potential opportunities in different segments of the broader market, reducing exposure to any single asset or sector.
Our today’s blog explores three main verticals crypto traders and investors could look into to hedge against the volatility of the crypto market. These include the various cryptocurrency categories, DeFi products, and other ecosystem assets, such as NFTs and real-world assets (RWAs).
Keep reading to see if you’re missing any opportunities in the market!
Vary your cryptocurrency portfolio
Diversifying your portfolio with different cryptocurrencies can help reduce your risk and improve your chances of achieving your investment goals.
Consider diversifying your holdings in these ways:
1. Buy tokens from various industries
This includes web3 gaming, data storage, finance, and more. Check out the table below to see examples for a few segments:
Each segment has its unique cycle of highs and lows. If you’re considering investing in a particular project, you can look up the performance of its native token on birdeye.so.
2. Make investments in blockchains’ native tokens
Different chains have different infrastructure offerings and community sentiment and, thus, attract certain types of web3 projects to their ecosystem. For example, users may consider investing in ETH, Ethereum’s native token, as it’s the mature hub of web3, hosting major DeFi players (Uniswap, Aave), NFT marketplaces (OpenSea), and other segments, with potential for further growth.
3. Invest in projects with a focus on different geographies
Investing in cryptocurrencies that have a strong presence in a certain jurisdiction can help reduce your exposure to geopolitical risks. In July 2023, XRP surged 75% when Ripple Labs, the US-based company behind it, won over the SEC ruling that its self-issued cryptocurrency is a security, ‘benefitting’ from the US’ arbitrary and contradicting approach to regulating crypto. Hedging against the US’, there are: Cardano’s ADA, which has a prominent presence in Japan with clearer regulations around cryptocurrencies; Tron’s TRX in China; Klaytn’s KLAY in North Korea; and many others.
4. Purchase protocols’ native tokens
These tokens can be used to access the project’s services, pay fees, and/or participate in the governance of the protocol. For example, UNI token holders can vote on proposals to actively guide the Uniswap protocol. LINK, Chainlink’s native token, is used to pay for the Oracle company’s services.
When diversifying, consider cryptocurrency market capitalization (market cap, for short). It represents the total value of a circulating supply. Established coins like Ethereum and Bitcoin, with high market caps, offer better stability, while small-cap cryptocurrencies carry higher risk but the potential for greater profits.
Invest in DeFi products
With their cryptocurrency portfolio, there are several different ways to grow users’ yields even more through different DeFi products, depending on their risk appetite. The main products we’ll explore in this section include yield farming, staking, and perpetual futures.
1. Yield farming
Yield farming is an investment method that encompasses profit-maximizing activities such as liquidity mining, lending, and borrowing. Besides being a way to earn passive income, users could also amplify profits from it by depositing liquidity pool (LP) tokens elsewhere or using leverage (borrowing to yield farm). Popular platforms for yield farming include Uniswap, Aave, Compound, and many others.
2. Staking
Staking is the process of locking up cryptocurrency for a certain period of time to secure yields or interest. It’s comparable to depositing your fiat savings into commercial banks to get interest payments. When evaluating which platform to go for staking, users are advised to understand how platforms generate higher yields compared to others and to be aware of any associated risks. Staking of cryptocurrencies is available on various centralized finance of CeFi platforms (Nexo), DeFi protocols (Lido Finance), and wallets (Coinbase Wallet).
3. Perpetual futures
Perpetual futures (also known as perpetual swaps or perps) is a type of derivative contract that enables traders to speculate on the future price of an asset without any set expiration date. Traders can hold their positions indefinitely without having to worry about settling the contract on a specific date. Perps is a widely traded instrument in the cryptocurrency market, as it offers traders advantages like leverage, hedging, and arbitrage. However, it entails risks including over-leveraging, liquidation, and volatility. Platforms that offer perpetual trading include centralized exchanges or CEXes (OKX) and decentralized perpetual exchanges (dYdX, GMX).
Invest in other web3 assets
Beyond cryptocurrencies, users could consider investing in other dynamic web3 assets like NFTs and tokenized real-world assets (RWAs) to unlock a broader spectrum of potential returns.
1. NFTs
According to a survey by Artsy, 38% of respondents said they purchase art as an investment. While some NFT investments are speculative, it’s important to understand that the value of art goes beyond its digital form and is rooted in belief in the creator and their unique vision. Pudgy Penguins, for instance, has achieved this by building a vibrant community around its unique penguin character (‘Pengu’), offering holders (‘Huddlers’) exclusive event access and commercial use of the NFT. Other high-value NFT collections like Bored Apes and CryptoPunks also present an attractive use case, serving as collateral for loans to engage in DeFi activities.
2. Tokenized RWAs
Tokenized RWAs are capturing increasing interest among individual investors, offering the potential to revolutionize the way we own, trade, and invest in real estate, art, and various commodities without borders. A specific interest is in tokenized US stocks and Treasury Bills amongst individual investors in high-inflation countries, as these investments offer a safer and more stable yield than their local banks’ savings interest or web3 investments. Users can check out some platforms that offer the purchase of various tokenized assets here.
Build a resilient web3 investment portfolio
Adopting a diversified approach within the web3 ecosystem proves to be a strategic move for crypto investors seeking to optimize gains and mitigate risks. By exploring multiple segments, including various cryptocurrencies, DeFi products, and assets like NFTs and RWAs, investors position themselves to capitalize on potential opportunities while minimizing exposure to the volatility of any single asset or sector.
Disclaimer
Birdeye only serves as a supporting tool to help users make informed trading decisions, not giving them financial advice! Please always conduct your own research and take responsibility for all of your investment decisions.
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