The DeFi revolution is underway, and that means opportunities to profit for those investors savvy enough to get ahead of the curve.
DeFi is short for ‘decentralized finance.’ This is a broad term referring to various platforms and cryptocurrencies built on blockchains.
Blockchain networks are run by people all over the world. There is no central location or intermediary, meaning members of the network can deal directly with each other.
For example, when you pay for dinner at a restaurant, you may think you are paying the restaurant directly. And that’s true if you use cash. But if you use a credit or debit card, you are actually paying the institution that backs the card. The institution then pays the restaurant. And of course, that middleman institution takes a fee.
However the cryptocurrency world works differently.
Let’s say you go to a restaurant that accepts payment in cryptocurrency. When you pay for your meal, the payment is transferred directly over the blockchain network to the restaurant. The members of the network verify the transaction, as opposed to a third-party institution.
The customer deals directly with the restaurant, and that means the transaction is both cheaper and more secure than traditional credit cards.
Here are 7 DeFi stocks and investments to watch for the blockchain revolution:
- Bitcoin (CCC:BTC-USD)
- U.S. Dollar Index (NYSEARCA:DXY)
- Ethereum (CCC:ETH-USD)
- OMG Network (CCC:OMG-USD)
- Riot Blockchain (NASDAQ:RIOT)
- Canaan (NASDAQ:CAN)
- Grayscale Bitcoin Trust (OTCMKTS:GBTC)
The DeFi revolution is a big opportunity for investors. Let’s dive into the details.
The DeFi Revolution: Bitcoin (BTC-USD)
The DeFi revolution started with bitcoin, back when BTC was the first and only cryptocurrency. Now there are more than a thousand offerings. Still, all of them can be seen as bitcoin with added features.
One reason so many other cryptos have emerged is bitcoin’s deficiencies. In fact, many analysts believe bitcoin won’t survive in the long-run. They believe the fundamental reason why it was created was to be a starting place for blockchain and cryptocurrencies.
A big problem with bitcoin is the power consumption of network transactions. It has been estimated that bitcoin and the original blockchain model use more power annually than the country of Peru.
This is a result of the mining process. Miners are the developers who validate bitcoin transactions with their computers. As an incentive for doing so they are rewarded by the network with payment of new bitcoin.
But here’s the problem: in order to mine, developers need to solve complex puzzles. This requires a lot of power. And as bitcoin gains wider adoption, the puzzles become increasingly complex and require increasing amounts of power to solve them. This could hinder long-term acceptance of the cryptocurrency.
U.S. Dollar Index (DXY)
One reason cryptos have gained popularity of late is due to weakness in the U.S. Dollar. As you can see on the above chart, last March the U.S. dollar index was trading around the 102 level. Since then it has dropped to levels around 90. That’s a decline of almost 12%.
As the government uses fiscal stimulus to fight the COVID slowdown, it adds money to the economy. The checks that people received and will be receiving are created out of thin air. And that means inflation.
If you look at some of the cash in your wallet, you’ll see that it says “promissory note”. And that’s what it is. It’s a promise by the Federal Reserve to honor it’s value. It isn’t backed by actual hard assets.
Prior to the United States leaving the gold standard in 1971, all U.S. currency was back by silver or gold that was held in a vault somewhere. Now that it doesn’t need to be backed, the federal reserve can print or create all they want.
But cryptocurrencies can’t be manipulated in this way, which proponents believe this makes them superior to currencies like the dollar.
Ethereum took bitcoin’s original blockchain and made some improvements.
Bitcoin only can be used a way to transfer payments. Ethereum developed what are called “smart contracts.” These prearranged contracts can be used to make payments on the completion of an agreement.
For example, if you hire a service provider you can setup a contract that would be executed upon completion of the services. The contract may specify that the payment would only be transferred if the service or job was competed by a certain date.
Ethereum is already widely in use amongst financial institutions. JP Morgan (NYSE:JPM) and other Wall Street firms are using them to settle trades.
In addition to the ability to develop contracts, the Ethereum network has other advantages over bitcoin. For one, it doesn’t need nearly as much power to operate. It also has a faster transaction time.
OmiseGO is a cryptocurrency that was developed using the smart contracts on the Ethereum Network, though it is a different currency. OMG was designed to enable financial services for people who don’t have bank accounts.
This is potentially a huge market: it is estimated that 2 billion people who have access to cell phones don’t have access to traditional banking. They can’t just walk to their local branch and meet with a customer service representative if the want to apply for a mortgage or a credit card.
Without access to these services, these people can’t establish credit histories. They are locked out of the system.
OMG has rallied recently. But the gains have been less than BTC over the same time period. But in the long run, if OMG is able to accomplish its goals the price may move significantly higher.
Riot Blockchain (RIOT)
Riot Blockchain is involved in digital currency mining. The company designs and develops specialized computers that make new bitcoin.
As you can see on the above chart, shares of RIOT have soared even more than bitcoin over the same time period. At the end of October, shares were trading around $3.30 per share. Today they are trading around $80.
This is the textbook definition of a bubble. There is no rational explanation for a company’s valuation to increase so much in so little a period of time. Especially this one.
RIOT has lost tremendous amounts of money over the past four years. And it’s predicted to lose money this year as well.
H.C. Wainwright is a broker which follows Riot Blockchain, and it seems they would agree. Their price target for RIOT is $28 a share.
Canaan is another publicly traded crypto-mining play. This company focuses on developing high-performance computing solutions to efficiently solve complex mining problems. Miners need to be faster than their competition in order to collect the cryptocurrency reward.
CAN stock has also gotten caught up in the recent market frenzy. Prices have soared over the past few months. In October, they were trading around $2. As you can see on the chart above, they just traded above $20.
But this is probably just a bubble as well. This company has lost a tremendous amount of money over the past few years. Canaan is predicted to lose money this year as well.
If it doesn’t turn a profit, it is hard to see how this company can maintain its present $3.9 billion market cap.
Grayscale Bitcoin ETF (GBTC)
Investors can gain exposure to crypto and DeFi industry in the equity markets.
The Grayscale Bitcoin Trust is an ETF invested in bitcoin. It trades like a regular stock, so it is popular with investors who would like exposure to bitcoin with having to worry about cryptowallets and such. As you can see on the above chart, the fund closely follows the price movements in BTC.
Grayscale also has developed ETFs that can give equity investors exposure to other cryptos as well. These include Ethereum, Litecoin (CCC:LTC-USD), and a few others.
But investors need to be careful. Because of the popularity of these ETF, they tend to trade at premiums to the actual asset value.
For example, the current premium of GBTC is about 7.5%. This means an investment on the fund of $107.50 would only control $100 worth of bitcoin. An investor could invest in bitcoin directly and save this amount.
At the time of this publication, Mark Putrino did not have any positions (either directly or indirectly) in any of the aforementioned securities.