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title: Guide for the Crypto Investor

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# Guide for the Crypto Investor

## Introduction

Although almost everyone knows about the existence of Bitcoin (BTC), few people know the economic theory behind the success of cryptocurrencies as an investment vehicle. The purpose of this document is to describe in a simple way the reasons why investing in Crypto is a reasonable and safe decision in the current circumstances.


## Monetary policy preamble:

Throughout history, society has based its economic activity on different systems. Barter and check are tools for transferring value and exchanging goods and services, which is the basis of the economy and society. Each of these systems has advantages and disadvantages that have determined its rise and fall over time.

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The current dominant monetary system is based on the use of banknotes issued by central banks in a system based on the issuance and payments of debt. Undoubtedly, this system arises from the needs of the globalized world, which required a global currency in which all goods can be appreciated. Due to the post-war circumstances, the United States was the country that consolidated its economic hegemony, with the dollar being adopted as the global currency in the last period.

However, the model implemented by the US has had undesirable consequences on social dynamics. By moving to a global and digital society, corporate groups took on a fundamental role in the economy. As companies transcended borders and began to have a global impact, their interests were no longer aligned with the individuals that comprise them, and they began to respond to investor returns. This caused a chronic erosion of the economic capacity of those who are not within the corporate power group, where most of the profits remain.


 

## The Dollar = Debt and Inflation

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Several decades ago the dollar stopped being collateralized by a unit of gold, to favor a model based on and the issuance of debt in the form of bonds that generate returns. The inflationary period was destabilized in 2008 with the real estate crisis in the US. On that occasion, the measure taken by the government in the face of the collapse of several banks was to issue rescue packages that disturbed the inflationary policy.

As the purchasing power of Americans declines, the government decides to take economic measures that allow credit to be issued to non-credit-worthy individuals, who increasingly represent a greater percentage of the population. Although the ravages of US inflationary monetary policy were already being felt starting in 2008, current circumstances have forced the federal reserve to take unprecedented measures to maintain the economy, which many economists fear will have long-term consequences. The pandemic has brought the current monetary system to the brink of collapse.

The covid has caused a large part of the population to lose their source of work. This is putting pressure on the credit system, which depends on monthly payments to maintain its liquidity. Likewise, the fractional reserve system is not adequately prepared to meet an outflow of foreign currency, which would lead to a bank holiday-type episode.

## Bitcoin is (better) Money

Cryptocurrencies, particularly Bitcoin, were born in response to the senseless monetary policies that have been practiced for the last decade by centralized institutions. The alternative offered by Bitcoin is a monetary policy that cannot be altered by any individual but responds to the laws that were determined in its code when it was created.

From an economic point of view, Bitcoin has many advantages over traditional money as the basic unit of a monetary system. The money functions are transaction method, accounting unit, and value deposit. Among these three characteristics, the store of value is the most important in today's economy, and the quality for which Bitcoin stands out.

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Bitcoin's monetary policy determines that there can be a total of 21 million Bitcoins in total. To date, around 18 million have been produced, and the rate at which they are produced is periodically reduced every 2 years, which is why over time bitcoins have become increasingly scarce. This differentiates this currency from any other since it guarantees that the value that is deposited in BTC will not be significantly diluted by new currencies entering circulation. This is in contrast to the current dollar situation, where 40% of all dollars in existence have been printed in the last 24 months.


## Ethereum and Decentralized Finance

As we mentioned earlier, BTC is the basic unit of the decentralized monetary system, however, the technology did not stop there. The second-largest blockchain network according to market capitalization is called Ethereum. Ethereum shares the decentralized features of Bitcoin, but takes the technology further by proposing "smart contracts."

A smart contract consists of a series of rules that are irreversibly recorded in the blockchain, allowing any user to interact with the contract from anywhere in the world without needing access permissions. The terms of the contract are executed to the letter, and no third party has at any time access to the funds deposited or the ability to modify the terms or the content thereof.

Smart contracts allow the creation of a series of decentralized applications that offer financial services and interact with each other without the need for human interaction. This opens up the possibility of having "programmable money" that is actively generating value for the user. Together these solutions are called Decentralized Finance or Defi for its acronym in English.

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## How to Invest in Crypto

### Expectations

Although the public generally regards this segment as a highly speculative investment, the reality is that the design of the decentralized financial system is based on a broad theoretical framework that takes into account the shortcomings of the current monetary system and offers a solution to many. of its central problems.

For that reason, investments in cryptocurrencies should be considered as an investment in assets that generate returns. By acquiring positions in different protocols that offer value to the ecosystem, it is possible to diversify the risk profile and generate both speculative and liability returns in the long term and in a sustainable way

![Map Not Updated](https://i.imgur.com/ioIMxPU.jpg)
 ###### Decentralized finance protocols on Ethereum.

### Investment Strategy

In the field of decentralized finance, we can classify investments into the following categories: Deposit of value, Passive returns, Speculative investments

- Deposit of Value:

    - In this category are included investments in Bitcoin, Ethereum, and to a lesser extent Defi protocols within the top 10 according to the market valuation. These protocols have an established history and tens of thousands of users.
    - Although short-term volatility can be intimidating, in macro trends we see a consistent increase in the value of these protocols. Considering that they are beginning to be used by financial institutions, of which to date only a small percentage have some exposure to this segment, it can be assumed that in the medium term the demand for these products will only increase, since their utility increases day by day.


- Passive Returns:

    - Once stores of value have been acquired, traditionally users were limited to waiting until their value increased to sell them and capitalize on the profits. However, decentralized finance offers various products that use user assets to generate passive returns. These products include loan and credit protocols where anyone can deposit a series of cryptocurrencies to earn interest by offering loans to other users who are on the platform. Being a decentralized product, the value generated is passed on to the lender instead of being captured by a financial institution.
    
    - The nature of decentralized finance allows users to offer interest rates on their deposits much higher than what is possible in traditional finance. At the same time, the programmable quality of these investments allows the execution of complex strategies programmatically, multiplying the returns by maximizing the efficiency of the available capital.


- Speculative Investments:

  - The speculative aspect of crypto investments centers around the flow of information in the system. Being a highly experimental segment, where anyone can build their protocol, there are many opportunities to discover new financial products before the rest of the market properly values ​​them.
    
   - Another point of speculation centers around the capacity of different protocols to acquire a greater number of users, as well as the capacity to be interoperable with the rest of the ecosystem. As the solutions mature and are interrelated with other existing products, they increase their intrinsic value since they increase the profitability of the protocol and the number of investors who find it attractive.


## Conclusion

For any investor, having some degree of exposure to this new segment is no longer a risk but a necessity to diversify the risk related to the current monetary system. Denying the shortcomings of the monetary system would be irresponsible under current circumstances.

However, it is even more important to note that the possibilities that cryptocurrencies and decentralized finance present a unique opportunity to generate value in a non-speculative way and have a part of the future of human cooperation in your pocket.