Looking to build a diversified crypto portfolio? DeFi, stablecoins and oracles are three cornerstone sectors to consider.
Welcome to Cointelegraph Market’s Altcoin Roundup, an in-depth newsletter that focuses on investing from the perspective of fundamental analysis and seeks to identify emerging blockchain projects and tokens that fill niche demands within the growing cryptocurrency market.
The concept of multi-sector investing has long been advocated in traditional finance as the conventional approach to building a balanced portfolio. Typical allocations include representation of stocks, government and corporate bonds, commodities and real estate.
Now that the cryptocurrency market has grown to a multitrillion-dollar ecosystem with numerous emerging assets, clear sectors are beginning to emerge. Savvy crypto investors looking to apply portfolio diversification practices to their holdings should begin to pay attention.
The previous Altcoin Roundup discussed some of the top layer-one solutions and coins like Polkadot/DOT, Cosmos/ATOM and Solana/SOL that have been gaining prominence over the past year, but these projects could also fall under the large-cap investment umbrella alongside high-profile assets like Bitcoin (BTC), Ether (ETH) and Cardano’s ADA.
Once an investor has an adequate representation of blue-chip projects, other emerging sectors like decentralized finance (DeFi), oracles and stablecoins can be considered.
DeFi: Uniswap, Aave and PancakeSwap
Decentralized finance emerged during the summer of DeFi in 2020, and the sector helped kick off the current bull market by bringing a new level of excitement to the crypto ecosystem, which was in need of the next big innovation.
One of the best metrics used to demonstrate the rising success of DeFi as a whole is the total value locked (TVL) ranking, which collectively reached an all-time high at $157.63 billion on May 14, according to data from Defi Llama, and stands at $116.62 billion at the time of writing.
The release of Uniswap’s decentralized exchange (DEX) interface — which enabled new projects to immediately launch and made tokens available to the general public — helped ignite a wave of growth and innovation across the market that continues to expand to this day.
In less than a year, Uniswap evolved into the top DEX serving the crypto community, seeing an all-time record of $5.74 billion in 24-hour trading volume during the market sell-off on May 19 and $5.37 billion in total volume locked on the platform.
The vast array of liquidity pools is the primary allure for investors looking to diversify their crypto portfolio. Through these pools, stakers have the ability to earn a yield by providing liquidity for the exchange in return for a portion of the trading fees. A number of pools offer staking returns ranging from 25% to 2,000%, and traders are able to select pools based on a variety of factors, including their appetite for risk.
While Uniswap has led the way for DEXs, there are other options like Aave’s lending platform that has emerged as the highest-ranking DeFi protocol by total value locked, with more than $14.1 billion in TVL at the time of writing.
Aave’s recent decision to offer layer-two (L2) access on Polygon has brought renewable energy to the AAVE ecosystem, as traders and liquidity gladly migrated to the lower-fee environment offered on Polygon. This resulted in a significant boost in TVL for both AAVE and Polygon’s native token, MATIC, which is now the second-ranked protocol by TVL, with $11.08 billion locked on the protocol.
Every balanced portfolio also has a small 1% to 5% allocation reserved for higher-risk assets, and the crypto market has no shortage of high-risk, high-growth assets.
For tokenholders who are open to a little more risk in return for higher yields, the Binance Smart Chain-based PancakeSwap boasts a TVL of $7.67 billion, and offers annual percentage rates (APR) of up to 482.54%, according to the project’s website, with all rewards paid out in the protocol’s native CAKE token.
Stablecoins are the new “savings accounts”
Though a token that stays pegged to a fixed value may not sound like the most attractive opportunity for investors, stablecoins have evolved to play a crucial role in the functioning of the wider cryptocurrency ecosystem.
Stablecoins often serve as the backbone of trading pairs on centralized and decentralized exchanges, as well as offering traders a simple way to lock in gains.
The two most prominent stablecoins are Tether (USDT) and USD Coin (USDC), which have circulating supplies of $60.9 billion and $21.6 billion tokens, respectively. Tether is currently the most traded crypto token, boasting 24-hour trading volumes that range from $100 billion to $290 billion.
Other popular stablecoins include Binance USD (BUSD), the stablecoin created for use within the Binance Smart Chain ecosystem, as well as the algorithmically controlled stablecoin DAI, which is minted via pledging collateral on the Maker protocol.
For those looking to earn a little extra yield while in the safety of stablecoins, there are multiple options available such as depositing tokens into a lending protocol like AAVE to earn up to 5% on deposits or the decentralized stablecoin exchange Curve, which offers yields of up to 50% for some stablecoins pools offered.
Other popular options include supplying liquidity for the various decentralized exchanges like PancakeSwap, which offers 8.64% for its DAI-BUSD liquidity pool, or QuickSwap, which offers a reward plus fee of the annual percent yield of 15.01% for its USDT-USDC pool and 26.75% for its DAI-USDC pool.
In a world that is becoming increasingly dominated by digital data, no cryptocurrency portfolio would be complete without access to an oracle provider. These entities are the industry’s heavyweights that facilitate the secure exchange of data and information within the cryptocurrency ecosystem, as well as wider financial markets.
Currently, Chainlink is one of the most dominant oracle projects and a key player that comprises a thriving open-source community of data providers, node operators, smart contract developers, researchers and security auditors.
While the Chainlink network doesn’t currently offer a direct way to earn a yield through a simplified staking or governance mechanism, it is easy for tokenholders to put their stash to work in DEX liquidity pools and DeFi protocols like Aave.
For investors who are not ready to trust decentralized exchanges and DeFi platforms, centralized yield-bearing companies like Nexo, Celsius and BlockFi are also available for crypto investors looking to earn a return on their holdings.
Centralized exchanges like Coinbase and Binance also offer direct staking capabilities. For example, investors could stake BAND for up to 11.7% APR on major exchanges.
As a result of the May sell-off, which saw more than $1.2 trillion in value wiped out of the cryptocurrency market, many of the top projects are now well below their all-time high values and trading at what some investors would describe as “bargain bin” prices.
While market participants remain unsure as to which way prices are headed in the short term, it would be wise to investigate these opportunities sooner rather than later, as the notoriously volatile crypto market can make significant moves at the drop of a hat.
Want more information about diversification into the above mentioned projects?
- Understanding the systemic shift from digitization to tokenization of financial services
- DeFi bucks crypto market correction as Uniswap v3 leads the charge
- Analyst says DeFi and stablecoins held up well as crypto markets imploded
- Negative funding rates incentivize traders to long Polygon and AAVE
- Chainlink releases new white paper in a shift toward smart contract computations