August 29, 2021

DeFi, Greed, and The Pursuit of Alpha

Essentially, users had the opportunity to earn 100%, 300%, 500% returns in a matter of days or weeks, depending upon how savvy you were to find these under the radar coins before they took off on their moon mission.

DeFi, Greed, and The Pursuit of Alpha


I'm Doug Lehman with our resident educator, Sonia Dumas.

On our last episode, we talked about the relevancy of Web 3. I want to lead with a quote from Robert Kiyosaki, and he stated, "It's not how much money you make, but how much money you keep and how hard it works for you."

So let's face it, cryptocurrencies, a lot of people are making a lot of money seamlessly out of nowhere.

What's really driving from your research, this frenzy?

So in order to look at what's driving some of this frenzy, we need to look at what happened in 2020, which was a financial stress test for countless individuals, businesses and public service organizations. The Federal Reserve.They have some data out there that shows household wealth dropped by $6.5 trillion dollars by March 2020. And we haven't even begun to see the real pain to household wealth as we emerge from this pandemic. Plus, there's the rise in financial insecurity among many households that is also being fueled by widespread indebtedness, wage stagnation in certain industries, the rise in essential living expenses such as housing, food and transportation.

And it's even beyond the scope of this show to go into the stress countless baby boomers are feeling due to the fact that they're financially unprepared for retirement or students who are graduating with a lot of debt and limited access to living wage job opportunities. So in reality, Doug, this is just the tip of the iceberg as to what's driving many to explore opportunities created by cryptocurrencies. But it also means that greed and getting rich quick is going to cause many to lose a lot of money and cause them to make ill-timed decisions.

What I find interesting, Doug, about cryptocurrency is that it's being quickly adopted as a new asset class, one that provides instantaneous global access to both the rewards and the risks to anyone with an Internet connection and a Web 3 wallet. And as Web 3 evolves, cryptocurrency is just one of the components that's offering both hope and  hype. And the way to mitigate some of that hype and the risk is by understanding the various uses of cryptocurrencies, their pros and cons, and to approach crypto with eyes wide open in order to make the best decisions about how to participate, if at all.

Making those decisions with your eyes wide open and doing research. Can you give us a snapshot of some of the financial opportunities that really exist now and some of the ones that are really being developed with cryptocurrencies?

Sure, Doug. So last year was the prime time debut of decentralized finance, also known as DeFi. And DeFi is essentially a blockchain based form of finance that does not rely on central financial third parties such as brokerage's exchanges or banks to give you access to financial instruments. Instead, it utilizes smart contracts. And so what we saw last year was food coins, yield farming, triple digit staking pools, liquidity provider fees and arbitrage trading opportunities that were literally being created by the hour.

Essentially, users had the opportunity to earn 100%, 300%, 500% returns in a matter of days or weeks, depending upon how savvy you were to find these under the radar coins before they took off on their moon mission. But this incredible opportunity also attracted scammers, hackers, rug pulls. 100X leveraged trading, and other bad actors that created billions of dollars in losses. And so right now we're seeing FOMO and greed shift from food coins to pet coins like Doge and Shiba, which Elon Musk and Vitalik have participated in the hype.

However, many smart traders in crypto live by the saying, buy the fear and sell the greed. And it appears to be human nature to overestimate the positives and underestimate the negatives. And we have to be clear that crypto is the Wild West and it is rife with risk. That includes coding errors, smart contracts risks, teams splitting up, liquidity risk, regulatory risk. There's impermanent loss, third party risk, just to name a few.

But what I do find hopeful is that the industry is maturing to reduce these risks as much as possible. And it's still a work in progress. As developers create blockchain based security best practices for its users, it's clear that risk is there, but it's not stopping people from putting billions of dollars into this.

So what's the potential upside for attracting nonstop flow of capital?

Well, here's the thing, Doug. Wealth gives you options and human ingenuity to create the fastest path to cash will never cease. So instead of trying to downplay the financial opportunities, you know, let's look at a few Web 3 projects that are on a serious mission to unlock economic value on a global scale. But before we do that, it's also important to highlight that for now, there is a big difference between owning cryptocurrencies in your own wallet versus buying crypto backed ETFs from traditional finance.

Many advisors have their clients asking about exposure to crypto. Some are being told don't talk about it. Others are advising outright against it, and others are doing their best to help their clients understand the ramifications of their requests. So one of the things about crypto backed ETFs is it will certainly open access from retirement accounts to discretionary accounts to participate in top performing cryptos. And there're companies like Bitwise and Grayscale that are leading this innovation. However, it is important to understand the fundamental differences between a crypto backed ETF and owning the actual coin.

What's the difference between crypto backed ETFs versus owning the actual coin?

So crypto backed ETF essentially is companies like Grayscale and Bitwise that go out into the market, they buy a basket of coins. Usually Bitcoin, Ethereum are a part of that basket and they give you access to be able to buy into their fund to participate in the price action of this coin. Now, you don't ever own the coins. You do pay an annual fee. Right now, annual fees are trending somewhere between 2%-2.5%, and each ETF tracks a different basket of coins.

However, the upside is also that you don't have to deal with a wallet. There are no seed phrase passwords you have to concern yourself with protecting. You don't have to know how to move coins. It makes you less susceptible to scammers and hackers when it comes to your crypto based wallets. And so these are some of the benefits that having a crypto backed ETF gives people, which is basically convenience. It's easier to use. It's a little bit more user-friendly.

People are comfortable with ETFs. However, owning the actual coin provides you with a whole different set of economic opportunities. But that also has to be weighed with how involved you get in understanding how to set up your accounts. Right. So when you actually own a coin, you actually have to set up an exchange account, whether with Gemini, Coinbase or Binance.Us. Then you also have to learn how to move money. So you have to learn how to move coins from wallet to wallet.

You have to learn how to interact with DeFi. You have to protect your seat phrases. So these are some of the responsibilities that come with owning the actual coin.

But when you own the actual coin, what are the economic incentives of that?

Well, there's the obvious price action, right, both up and down. So you get access to price action, but you also get access to earning interest. So there're protocols like Celsius Network and others that will allow you to earn double digit interest returns on an annual level that an ETF does not give you access to. ETF just gives you access to the price action. That's it.

But then there's also convenience. If you're willing to go down the road and get educated about DeFi in owning the actual coins, you not only get access to the price action, you get access to being able to earn double digit interest. You can utilize it as collateral. You can borrow against your coin.

If you decide to go down that road when you actually own the coin, you also have access to the fact that it's a currency. It could be used to buy things. With an ETF you can't use it as a currency, but actually owning the coin, you can utilize it to buy various items. And there're protocols out there that allow you to use your crypto to buy from Amazon, Wal-Mart, and Starbucks. So that's another benefit to owning the coin. And then when it comes to fees, so with owning crypto, the fees you pay is really the transaction fees.

So moving money from one wallet to the next always incurs a transaction fee. Obviously, when you buy and sell, it incurs a transaction fee. You get access to a new breed of decentralized hedge funds. So there's a protocol called Dhedge. And if you go to Dhedge, you'll learn that you have access to basically trading opportunities and strategies that are returning anywhere from on the low end, 12%to well over 60% every three months.

And it all depends on, obviously, the trading strategy of that hedge fund manager. But this is some of the other opportunities that come with actually owning the coin. And so there's a night and day difference between a crypto backed ETF versus owning the coin in all the economic opportunities that open up.

But both of them require education. And that's what I'm a huge proponent of, get educated about what these protocols are doing, get educated about these new financial opportunities that are being developed.

I can definitely say that best practices are still being developed. Blockchain security is still being developed, growing and maturing. Those companies and projects that are running these Web 3 innovations, they want security, safety, openness. They want it to be trusted. So that way, when you and I are interacting, we know what we're going into with eyes wide open. And this is honestly just the beginning of economic opportunities.

So get educated.