1. Money management
Decentralized finance (DeFi) has become increasingly popular over the past few years, offering users greater control and transparency over their financial assets. Here are some of the best practices for managing your DeFi money.
- Understand the risks: DeFi is a relatively new and rapidly evolving technology. Before investing in any DeFi project, it's important to do your research and understand the potential risks involved. Make sure you're comfortable with the project's code, team, and community before investing your money
- Use a hardware wallet and keep your private keys offline: To keep your DeFi assets safe, we recommend you use a hardware wallet, which is a physical device that stores your private keys offline, making it less vulnerable to hacking and theft. Your private keys are the only way to access and control your DeFi assets. Make sure to keep them safe and secure, and never share them with anyone. Sometimes, you may find tempting links on Twitter probing for your information, which might come in the form of giveaways, airdrops, etc. Verify the information via multiple sources before taking action, or just join our Twitter & Discord to get all the important event updates in the world of DeFi
- Monitor your investments: DeFi markets can be volatile, so it's important to keep a close eye on your investments. Regularly check your portfolio and adjust your investments as needed
- Don't invest more than you can afford to lose: DeFi investments can be risky, and there is no guarantee of returns. Only invest what you can afford to lose, and never invest money that you need for living expenses or other important financial obligations
- Stay up to date with industry news: DeFi is a rapidly evolving space with new projects and developments emerging all the time. Stay informed by following industry news and keeping up to date with the latest trends and innovations
- Diversify your investments: As with traditional investments, it's important to diversify your DeFi investments. Don't put all your eggs in one basket. Spread your investments across different projects and asset classes to minimize your overall risk.
Diversification is the practice of spreading your investments across a range of different assets or investments in order to reduce risk and protect your capital. The idea behind diversification is that if one investment performs poorly, the other investments in your portfolio may perform better and help offset any losses.
In the context of cryptocurrency, diversification can involve investing in multiple cryptocurrencies or DeFi projects, rather than just one. By spreading your investments across multiple assets, you can reduce the risk of being heavily impacted by the performance of a single asset or project.
For example, let's say you invest all of your money in one DeFi project. If that project performs poorly, you may lose a significant portion of your investment. However, if you spread your investment across multiple projects and one project performs poorly, the other projects may perform well and help offset any losses.
Diversification is an important part of any investment strategy, as it can help you manage risk and reduce the potential impact of market volatility on your portfolio. However, it's important to note that diversification does not guarantee profits, nor does it protect against all types of risk. You should always carefully evaluate your investment goals and risk tolerance before making any investment decisions.
The Barbell Strategy
The barbell investment strategy is a portfolio management approach that involves dividing your investments into two parts: low-risk investments and high-risk investments. The low-risk portion of your portfolio consists of stable assets, such as cash or bonds, while the high-risk portion is allocated to more speculative investments, such as growth stocks, cryptocurrencies, or alternative investments like DeFi projects.
The name "barbell" comes from the fact that the portfolio is weighted heavily on either end of the risk spectrum, with little or no exposure to assets in the middle. The goal of this approach is to protect your capital while also taking advantage of the potential for high returns in the high-risk portion of the portfolio.
The low-risk portion of the portfolio provides a safety net, helping to preserve capital during times of market volatility or uncertainty, while the high-risk portion of the portfolio offers the potential for high returns and growth, but also comes with a higher level of risk.
Here is an example of a diversified portfolio in DeFi that involves using the barbell strategy:
Low-risk portion (75-90%)
- Bitcoin (10-30%): This includes investments in bitcoin, which is considered a blue-chip cryptocurrency with a lower risk profile than many altcoins. Bitcoin has a long track record of being a stable investment and has proven to be a good store of value
- Ethereum (10-30%): This includes investments in ethereum, another blue-chip cryptocurrency that is the backbone of the DeFi ecosystem. Ethereum has a strong developer community and offers a wide range of use cases beyond just being a currency
- Stablecoins (20-40%): This includes stablecoins such as USDT, USDC, or DAI. These stablecoins are low-risk assets that provide stability to your portfolio and help protect your capital during market downturns. Allways diversify into various stablecoins, ideally across multiple chains
High-risk portion (10-25%)
- DeFi small-cap tokens (5-10%): This includes investments in smaller DeFi coins with higher risk profiles. These coins have the potential for high returns but also come with higher risk
- Decentralized exchanges (DEXs) and yield farming protocols (5-15%): These platforms offer higher-risk opportunities for higher returns
Money management is crucial in DeFi because it involves handling cryptocurrencies and digital assets, which can be volatile and subject to significant price fluctuations. Effective money management practices can help mitigate risk and ensure that funds are allocated efficiently to generate maximum returns while minimizing potential losses.
In the next articles, we will show you how to build different types of portfolios.
Good money and risk management is the key to whether you succeed, or if you’re Not Gonna Make It (NGMI ) in DeFi. Most of the people who earned good money in crypto, eventually give the money back to the market. Learn how to properly manage your positions and mitigate the risks to avoid ending up in the NGMI group.