Starting a journey in crypto: How to get to the good bits without getting burned.
Crypto, Blockchain and Web3 for Humans
Over the past two days, we have participated in the FT Live Crypto and Digital Assets Summit, which brought together Traditional Finance (TradFi) and Decentralized Finance (DeFi) folks. Having had a background in finance and careers in tech, it was interesting to observe two worlds with different mindsets coming together or at times, colliding.
At its core, crypto is about the decentralisation of the internet and the creation of an alternative, and as many crypto enthusiasts would argue, a fairer system of distributing value, which would reward all participants. It challenges the existence of traditional institutions, such as central banks, banks, and market makers, as blockchain smart contracts power systems that do not require trust in any particular institution. It makes for an interesting combination of libertarian and communist features. This doesn’t sound like something that TradFi institutions should be rushing towards, right?
Wrong.
If the price of bitcoin (BTC) had continued to linger in the range of being worth a pizza, it would have remained on the fringes of the financial system for much longer.
However, as BTC started rising, new digital assets mushroomed, and the total value of crypto assets took off, the internet has filled with stories of early adopters making life-changing amounts of money, and the bitcoin rush has started. Add to it fast dwindling opportunities in the traditional financial markets to find decent returns at an acceptable level of risk, and it becomes understandable that both retail investors and, later, institutions got curious.
Also, prominent Silicon Valley VCs such as a16z, Tim Draper and others started pumping money into Web3 companies (Web3 as a friendlier term for everything crypto, plus metaverse on top), and well-known TradFi bankers started joining crypto businesses, for example, Bob Diamond’s SPAC acquiring Circle, a company behind USDC, one of the leading stablecoins.
An interesting situation has emerged. Both institutional and retail investors are drawn towards the crypto honeypot by FOMO but are wary of complex ways of dealing with it and fearful of losing everything. And rightly so, like crypto, particularly DeFi, is a very young space. To date, many interactions with it have happened at the levels of underlying protocols, which is a high-friction way of accessing the new world. Even where there are more established apps, such as (centralised and decentralised) crypto exchanges, user experience is nowhere near what we have come to expect from leading finance platforms such as Revolut and Interactive Brokers, to name a few.
DeFi rewards the curious, brave and thorough. So dive right in!
In our view, for anyone looking at crypto on behalf of their institution, the first necessary step is to get closely involved with it personally. Here’s a starter for three from us. Perhaps you are already there, and perhaps you have made the first step?
1. Get an account with one of the centralised exchanges and create a simple portfolio of digital assets.
Pick an exchange that has been authorised in your home market. Binance, Coinbase and FTX are the largest. Unlike decentralised exchanges, these run centralised order books, so no culture shocks here. Opening an account is very similar to any other trading platform, so expect a bit of KYC.
This is by no means investment advice, so please do your homework, but the HODL strategy (which started its life as a misspelling but got its meaning of ‘Hold on for Dear Life”) for BTC (market cap as of 28/4/22 of $762bn) and ETH (market cap $355bn) is a good place to start. We at Engelworks also hold a few other tokens of protocols that we believe have good prospects (including Solana - $33bn, Cardano - $28bn, Polygon - $10bn) and large market caps, which should (at least in theory) have a positive impact on volatility. You can also find some good hints by studying the portfolio holdings of key crypto funds. Several research firms provide this information and detailed reports on coins, market stats, etc. Messari is our favourite.
How does Bitcoin compare as store-of-value e.g. to Gold?
Source: https://goldprice.org/spot-gold.html
SO WHAT: gold has been recently under-delivering in its traditional capacity as a store of value in the times of uncertainty (there have been some whispers that this could even be related to a rise of interest in BTC as a store of value), and although it is still a useful tool in a well-diversified portfolio (e.g. in trend following), some exposure to top cryptocurrencies could be useful, in particular as stock markets are continuing to disappoint.
An account with a centralised exchange is good for trading more popular digital assets; however, to explore the world of DeFi, and enjoy its spoils, you’d need a crypto wallet.
2. Install a crypto wallet to be able to send, receive and store crypto, as well as earn a return on your holdings
These exist in various forms, including a browser extension, a hardware wallet, a mobile app and a web wallet, and range from completely ‘cold’ (totally offline) to ‘hot’. We (and another 20+ million users) are using Metamask. It is a crypto wallet and gateway to all popular DeFi apps. It is a ‘hot’ wallet, as private keys are kept in a user’s browser. During the setup, it provides you with a unique 12-word Secret Recovery Phrase, which could make for an attractive tattoo.
Such a wallet can be useful for several reasons:
Get tokens that are not listed on major exchanges (some of them can be very lucrative but proceed with caution)
Gateway to accessing various yield-generating opportunities, such as lending and borrowing, supplying tokens into liquidity pools and staking LP tokens. Connecting the Metamask browser plugin to most DeFi applications is a very easy ‘one-click’ operation.
Transfer crypto to others, for example, to a charity.
Yield generation is an exciting opportunity. However, it is very complex and can make your brain hurt (ours did!). One of the ways to get in is via Yield Optimizers - protocols that navigate various yield generating opportunities in crypto and design a profitable strategy. Yearn is a good example of such an optimiser. It develops both its own strategies and crowdsources strategies from the community. When a strategy (or, in their language, a Vault) makes money, its proceeds are shared with the creators. So think of it as a next-gen open source hedge fund. We’ll cover Yield generation in more detail in future posts, but Yearn could be a good place to explore.
SO WHAT: in TradFi, the best Yield opportunities have been traditionally available to a relatively small number of large players, with most people getting meagre 0.1% savings rates on their deposits. DeFi has a chance to democratise these. Currently, DeFi is a Wild West, but it has the potential to create a fairer financial system.
3. Help Ukrainians in their fight for freedom.
Ukraine is the first country whose government uses crypto, among other traditional currencies, as a source of donations. It has received more than $100m in crypto donations to date. It’s a good use of some of the funds in a newly installed crypto wallet.
Lambo or limbo?
So, how has your experience been with crypto and DeFi to date? Please get in touch if you have any comments or questions - would love to hear from you.