Top 3 Mistakes to Avoid When Investing in DeFi

Imagine that you have heard about a brand-new DeFi project that is the talk of the town. Your heart is pounding with anticipation and hopes of raking in a good profit. Then, without conducting plenty of research or knowing the risks involved, you decided to invest a substantial portion of your funds.

After a week, your investment is wiped off, and you regret your decision. That’s what happens when you invest in DeFi without knowing the pitfalls to avoid. DeFi is one of the most lucrative aspects of the crypto market.

Data from DeFillama shows that the TVL of the entire DeFi market is around $40.51 billion. While this figure shows that the sector was hit by the bear market, we anticipate that it will skyrocket once the bull market kicks in. So, here are three major mistakes to avoid when investing in DeFi.

source: Defillama
First Mistake: Lack of Research

We often tell our users to “do your own research” (DYOR). That’s one of the biggest problems investors face. Our industry is filled with “experts” shilling their favorite projects. But never invest based on what you read on Twitter or any other source, however legit.

It is important to take the extra step to do your research. Doing your research would involve verifying the numbers projected by the project. You can use some crypto-analytical tools like Messari and Coinmarketcap. Furthermore, vetting their social media platforms, whitepaper, and tokenomics is another good research strategy. It is also important to answer the following questions in your research:

  1. What problem does the project solve?
  2. Is it bringing any innovative technology or service to the market?
  3. Are the team members credible?

Evaluate the project’s roadmap and long-term viability. A good roadmap spells out the project’s future strategies, objectives, and milestones. So, look for a project with clear plans.

Finally, DeFi initiatives are not exempt from security flaws and breaches. You must carefully examine the project’s security procedures if you want to secure your investments. Once you’ve done all this and are satisfied, you can make an informed decision.

Second Mistake: Poor Risk Management Strategies

DeFi investments are often volatile. So if you don’t have a good risk management strategy in place, you can find yourself vulnerable to unwarranted risks and possible losses.

It is important to know that different factors affect the price of your asset. For example, regulatory changes and market sentiment are huge factors. Recognizing this underlying volatility can help you mentally prepare for the ups and downs. Also, you’d have to avoid making impulsive decisions based on fluctuations.

Your risk management isn’t complete without you setting your goals. You have to decide if you are in it for the short or long term and what your strategy will be. Long-term thinkers need to be very patient to watch their investments grow.

Another important strategy is diversification. This involves spreading your money across various projects. The whole idea is to lessen the effects of any possible losses from a single investment and raise the likelihood that other investments in your portfolio will succeed.

Third Mistake: Transferring Crypto to the Wrong Address or Losing Your Seed Phrase

Transactions on the blockchain are, by nature, irreversible. So, while a bank can rectify wrong transactions, it is pretty impossible in crypto. Transactions are final. So, to be safe, it is important to send tokens to the right addresses.

Another crucial mistake to avoid is playing around with your private key. DeFi protocols use private keys, which are a lengthy, singular string of characters that grant you access to your assets. Usually, a random “seed phrase” of 12–24 syllables provides a key.

Your primary job is to protect your key or seed phrase because losing them means losing your access.

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