Investors interested in crypto have been amazed by some of the gains cryptocurrencies and companies in the industry have posted over a short period of time. Companies like Silvergate Capital (SI -4.64%) and Voyager Digital rose 700% and 1800% respectively since last December.
What are the next potential under the radar crypto stocks that could provide early investors with returns like these? Investing in many of these early stage companies is risky and shares will endure high volatility, but it is worth exploring for risk-tolerant investors as part of a well-diversified portfolio. One example is DeFi Technologies (DEFT.F -3.83%), which I would compare to an early stage Silvergate.
DeFi Technologies is a digital asset investment firm focused on decentralized finance. It trades over the counter in the United States (meaning it is not listed on a major exchange like the NYSE or the NASDAQ), on the NEO exchange in Canada, and on the Frankfurt Exchange in Germany.
What is the value proposition here?
DeFi Technologies' value proposition boils down to this: It makes DeFi protocols (think Polkadot (CRYPTO: DOT), Cardano (CRYPTO: ADA), and Uniswap (CRYPTO: UNI)) more accessible to everyday investors who may not be crypto natives. Many investors don't know what DeFi assets to follow or invest in and, and as the company points out, "the process of buying into a Defi asset requires a steep learning curve. Having a wallet and having to fund a separate crypto account is foreign and intimidating to the average investor." By listing a suite of DeFi exchange-traded products (ETPs), the company is essentially making investing in a DeFi asset like Uniswap more like buying a stock or an ETF. The company makes the process of investing in these assets easier and more accessible for investors that want exposure to this emerging sector but do not yet feel comfortable creating their own crypto wallet or participating in a decentralized exchange (DEX).
Here's how it works. DeFi Technologies provides the convenience of investing through a normal brokerage account, which means investors don't have to set up dedicated crypto wallets, maintain private keys, or deal with the risk of getting hacked. DeFi Technologies compares this to wrapping Defi protocols in 'equity wrappers' so that investors can buy DeFi protocols in an easy and intuitive way. Opinions on the difficulty or inconvenience of setting up a wallet or holding a private key will vary based on the individual, but many new crypto investors will still appreciate the easy access. For example, if I am interested in Solana but don't want to set up a dedicated wallet or an account with a crypto brokerage, I can buy DEFTF's Solana ETP, which owns Solana as an underlying asset through a standard brokerage account.
How does DeFi Technologies make money?
DeFi Technologies makes money in three ways: management fees from its ETPs, its venture portfolio which invests in emerging DeFi protocols, and lastly its governance business, in which it runs nodes, meaning it uses the assets it holds to earn small fees for validating transactions on the different networks. The ETP business currently has over $300 million in assets under management between 6 different ETPs that trade in Sweden and on Euronext (a pan-European exchange). It derives revenue via management fees on these, just as any asset manager would on a traditional ETF, and from staking the crypto assets that these ETPs hold to earn interest. As interest in decentralized finance and the crypto space continues to grow, these ETPs can take in more funds and drive more revenue.
What are the risks?
DeFi Technologies is a relatively new company that trades over the counter and comes with all of the risks that this entails, like less liquidity for trading and a lower threshold for financial reporting standards as compared to stocks that trade on major exchanges. Furthermore, a steep decline in crypto prices or a loss of investor interest in the space would hurt Defi and hamper its ability to increase its assets under management as well as decrease the value of its various investments.
Can DeFi technologies become the next crypto multibagger?
I view DeFi Technologies as a high-risk high-reward investment that could turn into the next crypto multibagger for risk-tolerant investors who make it part of a well-diversified portfolio. It makes assets like Solana and Ethereum more accessible to a wider pool of investors with its exchange-traded products, which is a solid value proposition that solves a challenge for many investors. I view its investments in early stage DeFi protocols as an added bonus. If the company can continue to attract new assets under management for its ETPs, successfully roll out new products, and invest in new digital assets that take off, I think that this could be yet another multibagger in the crypto sector.