Investing in DeFi: How to build a crypto portfolio beyond bitcoin

Bitcoin and ethereum may dominate the crypto market when it comes to value, but there is more to the sector than just high profile cryptoasset price moves.

The crypto sector is also attracting investors due to the opportunities and functionality that the underlying blockchain technology provides, with one particular area of interest being decentralised finance. 

The crypto sector has come a long way since bitcoin first emerged in 2009, with the aim of providing a technology-based currency that removed the need for banks.

There is more to the crypto market than just high profile cryptoasset price moves

There is more to the crypto market than just high profile cryptoasset price moves

There is more to the crypto market than just high profile cryptoasset price moves

But things move fast in the crypto space and the spotlight has shifted from digital currency to other opportunities cryptoassets can provide, such as through decentralised finance.

It can be hard for investors to evaluate cryptoassets and their applications, so here we’ve outlined what decentralised finance is and explain how eToro’s Smart Portfolios and eToro’s Academy aim to help.

This is an industry very much in its infancy and anyone considering investing should do careful research. The Financial Conduct Authority advises cryptoasset investors to only invest money they can afford to lose. 

What is decentralised finance?

Major cryptoassets such as bitcoin, ethereum and cardano are built on their own technology known as the blockchain.

One of the attractions of many of the alternative blockchains to bitcoin is rather than keeping this technology locked in to that application, they have been opened up to allow developers and organisations to create apps. 

These include letting people exchange, transfer and use funds without any intermediaries in what is known as decentralised finance or DeFi.

Decentralised finance aims to shift the centre of power away from traditional financial institutions such as banks, insurance companies and clearing houses.

DeFi firms argue that this can offer lower charges and faster service without having to rely on expensive and bureaucratic traditional financial services. 

Smart contracts can be used to make this work. These are programs on a blockchain that complete actions when set conditions are met – this can execute an agreement automatically and remove the need for middlemen.

This is an industry very much in its infancy and anyone considering investing should do careful research

This is an industry very much in its infancy and anyone considering investing should do careful research

This is an industry very much in its infancy and anyone considering investing should do careful research

DeFi applications may include money management tools that make use of smart contracts and fast transfers offered through blockchain technology and can even make payments in virtual reality worlds, including the ever-expanding metaverse.

Along with cryptocurrencies, decentralised finance and other ways of using blockchain technology have become known as crypto-assets, adding a whole new terminology for investors to understand.  

Investing in decentralised finance

Decentralised finance aims to provide financial tools built and recorded on public blockchains without clunky traditional banking and administrative systems.

The idea is that everything is done online and can be tracked using smart contracts stored on the blockchain.

Investors in DeFi buy cryptoassets on the basis that widespread adoption of the platforms will see the respective cryptoasset’s price rise, as these tokens are generally used to power applications.  

For example, Ethereum is a common blockchain that decentralised finance apps and tools are built on, which in turn could help boost the value of its native cryptoasset, ETH. 

A fee is required to conduct a transaction or execute a contract on the Ethereum blockchain, this is known as ‘gas’. Gas is commonly expressed in Gwei, which is a smaller denomination of the ethereum cryptocurrency ETH. Like pence and pounds we have Gwei and ETH. 

Some other blockchains aside from Ethereum that provide functionality for decentralised finance are Cardano, Tezos and Solana. 

One example of a DeFi application is Aave, which lets borrowers use their cryptoasset as collateral to access loans directly from investors without an intermediary.  

As with any type of investment, you need to assess the viability of a decentralised finance project, as well as its aims and the people behind it.

This can be time consuming and takes a lot of research, as these projects can be complex to the untrained and inexperienced eye, and the firms are often based abroad so there may also be language and cultural barriers.

Investors can harness the expertise of eToro’s experts to access this sector.

The investment platform’s DeFi Smart Portfoliois composed of cryptoassets selected specifically due to their role in the DeFi sector.

The eToro Investment Comittee evaluates DeFi projects based on their white-papers, (a document that outlines the plans for a decentralised finance tool), and looks at the use case, expertise and background of the entity as well as its online presence. 

The Smart Portfolio holds 11 cryptoassets including cryptocurrencies such as ethereum as well as projects that have been launched on its blockchain network such as Maker.

Launched in September 2021, the portfolio has more than $5million of assets under management across 5,172 investors (total performance: 77.5 per cent).

Investing in a cryptoasset portfolio

An important consideration when investing is diversification, which can be done across different asset classes and also within individual asset classes.

A diversified portfolio generally does not consist of just one type of investment, such as crypto, but is spread across a variety of assets, stocks, bonds, commodities and cash, for example.

The FCA has warned that crypto is volatile and high risk and investors should only put money they can afford to lose into this element of their portfolio.

For the crypto element of any portfolio, diversifying and putting your money into a range of well-researched projects and cryptoassets can ensure risks are spread across different use cases rather than putting all your eggs in one basket. 

eToro has two additional Smart Portfolios that aim to address this.

Its CryptoEqual Smart Portfolio aggregates a diversified portfolio with exposure to selected cryptoassets, in line with their status in the crypto market.

The portfolio currently holds 20 cryptoassets, allocating 4.97 per cent of its more than $5million under management to each include bitcoin, ethereum, binance coin and XRP (total performance: 239 per cent).

It has more than 10,000 investors and returned 203.45 per cent last year.

Another approach is to allocate funds to each cryptoasset according to its market capitalisation.

This is the strategy of the CryptoPortfolio Smart Portfolio, which has more than 19,000 investors (total performance: 531 per cent).

It allocates investor money based on the size of the underlying cryptoassets.

This means its highest weighting is towards bitcoin, the largest cryptoasset, at 26.6 per cent followed by 13 per cent exposure each to ethereum and binance coin.

Each of these three eToro Smart Portfolios have a minimum investment of $500 and could be a hassle-free way for you to invest in a market that you believe has potential for growth in the future. Explore the DeFi Smart Portfolio and CryptoEqual Smart Portfolio on eToro.

Cryptoassets are highly volatile and unregulated in the UK. No consumer protection. Tax on profits may apply.

This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking into account any particular recipient’s investment objectives or financial situation, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.