It is extremely difficult to identify which cryptocurrency is worth investing in at the moment.
However, it is possible to identify trends that could generate increases in value or real speculative bubbles.
In truth, during bear markets, it’s kind of hard for this to happen, but at the same time, bear markets could theoretically be the best times to invest in undervalued cryptocurrencies.
The trend to find out which cryptocurrency to invest in
At this specific time, for example, it might seem that the decentralized finance (DeFi) have a downward trend, given what happened in May with the implosion of the Terra DeFi ecosystem.
There are, however, those who do not believe so. In fact, the co-founder and CEO of Binance, Changpeng Zhaowrote a tweet yesterday in which he hinted that a new positive trend could be emerging in the DeFi sector itself.
Binance is investing heavily in DeFi.
(not financial advice)
— CZ 🔶 Binance (@cz_binance) October 23, 2022
The fact that, as CZ reveals, Binance is investing heavily in DeFi seems to mean that they have detected some kind of awakening of this trend.
The risks of cryptocurrencies and the DeFi sector
However, it is important not to forget that DeFi is not all the same.
For example, him avalanche project was born in 2020, grew a lot in 2021 and in 2022 suffered a drastic drop in interest. After peaking in November 2021, the price of its native cryptocurrency AVAX fell 89%. Despite this, it is still a living and active project.
Instead, the Terra project was born in 2019, grew a lot in 2021, but literally imploded in 2022.
These are two similar projects in many ways, but with a story that took two completely different directions this year. Until May they had evolved almost in parallel, but in May Terra imploded, while Avalanche only contracted sharply.
Suffice it to say that the current price of AVAX is more than five times higher than it was before the 2021 bullrun, while that of Luna Classic (the cryptocurrency of the Terra project) is more than two thousand times lower.
How to invest in the crypto market avoiding risks
In reality, the risks cannot be avoided when investing in DeFi, but you can at least try to reduce them.
For example, by studying the Terra project long before the implosion, it was possible to realize that there was an underlying problem. In fact, everything was based on the UST algorithmic stablecoin, which, however, did not have enough coverage. In addition, it had a management system based on the volatile value of LUNC (Luna Classic), so as soon as it started to drop rapidly, UST lost its peg to the dollar and caused the entire ecosystem to implode.
Studying the Avalanche project, it could be seen that this problem was not there. So while the risks of an investment in AVAX were still high, they were significantly lower than an investment in LUNC (then simply called Luna).
Investing in these projects is equivalent to betting on their future success, but without having enough information to accumulate reasonable certainty that they will succeed.
As always, when investing, it is advisable to only invest amounts that you are willing to lose, because the risk of losing is really high. The moment one realizes that they are basically gambling, with relatively little chance of success, one can take a more reasonable and perhaps prudent approach.
That said, sometimes those bets pay off, like, say, the ones that bought AVAX in 2020.
Something vaguely similar also happened in 2019, when news began to spread that DeFi was catching on. Those who bought ETH at the time, seeing that Ethereum is the backbone of decentralized financethey could have paid less than $400 for him, and if they kept it until now, they would have a profit of more than 250%.
Sure ETH is a lower risk investment than AVAX or LUNC, but it is still a relatively high risk investment.
The DeFi Landscape
At this time, after ethereum Y BNB Chainthe only other blockchains to have over $1 billion in locked tokens in DeFi protocols they are Tron, Avalanche and Polygon. They are followed by Arbitrum, Optimism, Solana and Cronos.
It should be noted that Polygon, Arbitrum and Optimism are Layer 2 chains of Ethereum.
A Interesting fact about these blockchains is the relationship between the capitalization of its native cryptocurrencies (Mcap) and TVL.
Solana has a very high Mcap/TVL of over 11. This suggests that SOL’s market cap might be a bit high.
The one with the lowest ratio is Optimism, at an incredible 0.19, suggesting a very low market cap. Even Tron has a decidedly low Mcap/TVL ratio, just over 1.
For reference, Ethereum has it at just over 5, which, unsurprisingly, is somewhere between Solana’s 11 and Tron’s 1. Ethereum is by far the leading benchmark in the DeFi sector.
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