Upside & Risks of an Investment in DeFiChain (DFI)
DeFiChain was the best performing new blockchain of 2020, and there is a strong case to be made that the value of the DFI Coin will continue to rise this year.
But how much value growth potential does DeFiChain actually still have? And what are the risks associated with investing in DFI? We address these two fundamental questions in detail in this article.
DeFiChain is a young crypto project that is less than a year old and has already taken the DeFi market on Bitcoin by storm. Since the summer of 2020, the DFI Coin — the native coin of DeFiChain — has already increased more than thirtyfold and many are now wondering if it can go even higher.
In the following article, we will discuss the price potential and risks of investing in DFI. For this purpose, we will first take a closer look at the past performance of DFI before moving on to a realistic and potential future development. When it comes to the risks of investing in DFI, we will take a close look at the four main risks.
Let’s start with the upside potential of an investment in DeFiChain — how much can still be earned from an investment? For this, we take a closer look at:
- Why & When the DFI Coin’s first sharp increase took place
- Why & When the DFI Coin could continue to appreciate much further
- What is a realistic and potential long-term price of the DFI Coin?
- How does DeFiChain compare to other alternative cryptocurrencies?
Why & When the DFI Coin’s first sharp increase took place
DeFiChain launched on the day of bitcoin halving on May 11, 2020.
For a coin that has only been around since May 11, 2020 — the day of the Bitcoin halving — the price was relatively flat in the first few months after launch, with small ups and downs. It was only with the introduction of the first functional product — a fully decentralized exchange with the possibility of liquidity mining — in early December that the price started to rise rapidly. The price rose from around $0.45 USD on 09 December 2020 to $2.2 USD on 09 January 2021 in just one month.
The rest of the crypto market was also starting to pick up momentum at this time, but DeFiChain performed the best among all new blockchains launched in 2020 and was also able to outperform Bitcoin itself, definitely due to the successful launch of its first product — the decentralized exchange (DEX).
Why & When the DFI Coin could continue to appreciate much further
The successful launch of the decentralized exchange is far from the last product DeFiChain will bring to market.
Already in the foreseeable future and still in the second quarter of 2021, atomic swaps with Bitcoin will be possible for the first time. This means that it will be possible to transfer Bitcoin to and from the decentralized exchange, for example to a central exchange or your hardwallet, in a completely decentralized way and without trust or permission.
In the third quarter of 2021, there will be a true sensation: the launch of the first fully decentralized tradable synthetic shares!
This will make it possible to buy, sell, or for example, leverage shares just like you are used to with centralized services, but without having to trust a third party or ask for permission.
With another use case as valuable as this, it’s not unlikely that the DFI price could rise again, as it did after the last launch. How far? Of course, no one can tell you exactly, but we’ll give you an assessment below.
What is a realistic and potential long-term price of the DFI Coin?
As described above, one of DeFiChain’s biggest new use cases will be decentralized trading of stocks, adding to the existing functionality of decentralized trading of cryptocurrencies.
And this new functionality should not be underestimated, as the value of all stocks traded on stock exchanges in 2019 was worth $95.2 trillion U.S. dollars.
If DeFiChain can capture even a tiny fraction of this market, a mere 0.01% capture would already be worth nearly $100 billion USD.
And compared to the many competing traditional trading platforms, DeFiChain has an exciting unique selling point: It offers a completely decentralized marketplace where you do not have to ask for permission or trust. The private keys to your wallet put you in sole control.
So, considering this enormous potential, even a price of $250 USD and more per coin doesn’t seem so unrealistic anymore in the long run (Which would currently correspond to an approximate market capitalization of $100 billion USD).
The $50 USD mark per coin also already seems very realistic in the short and medium term — but more on that in the next question.
How does DeFiChain compare to other alternative cryptocurrencies?
One important point to consider is: In any market apart from currently crypto, the value of different investment opportunities is widely spread. This can be seen in the example of stocks: as mentioned above, they were worth $95.2 trillion as of 2019, but the highest-valued company at the time, Apple, had a market value of “only” just over $1 trillion — just over 1% of the total market.
In the relatively young crypto market, on the other hand, things are still quite different: Here, Bitcoin currently accounts for more than half of the total market with a dominance of over 50%. If you look at the ratio in other markets, this dominance will probably decrease significantly in the long term.
So it would seem reasonable to assume that alternative cryptocurrencies will be a lucrative investment opportunity for years to come. The difficulty, however, is of course picking the right crypto investments.
Furthermore, if you compare DeFiChain to many other alternative cryptocurrencies, it already offers more functionality and utility than most of the other alternative cryptocurrencies now and especially later this year with the launch of decentralized stocks.
And yet DeFiChain is currently not even among the top 50 cryptocurrencies: Others, such as Chainlink, Polkadot, and Cardano, already have market capitalizations 10, 20, and even 30 times higher than DeFiChain. Thus, it could be that DeFiChain is still relatively undervalued and still has enormous upside potential, especially now and with an imminent launch of further groundbreaking product launches.
As with any other investment, there are some risks that could lead to a partial or complete loss of capital when investing in the DFI Coin.
In total, there are four main risks, which we will explain in more detail below:
- A critical error in the programming (bug in the code)
- A manipulation of the blocks (centralization)
- The platform risk (How & Where you hold your coins)
- High volatility (combined with high liquidity)
Risk: A critical error in the programming
Every one of us has experienced it: you use an app or website and somehow something just doesn’t work the way it’s supposed to. This can be a specific action that causes a crash, or completely harmless things like a small display error.
The fact that such errors, also called “bugs”, occur from time to time is completely normal for any project — large or small. Over time, the code is then optimized and occurring bugs are eliminated.
It becomes critical when such a bug damages sensitive data, or in the case of blockchains when devaluation of the underlying cryptocurrency becomes possible. Devaluation would take place, for example, if somehow a so-called “double spend” could be executed, i.e., a double output.
Potential bugs can be a risk with any blockchain, whether DeFiChain, Bitcoin, Ethereum or any other cryptocurrency.
This risk can be minimized by making the entire blockchain code open-source, so publicly accessible. This allows anyone, without exception, to check the code themselves, track down potential errors and then eliminate them.
DeFiChain is — just like Bitcoin — completely open-source. And this is where it gets particularly interesting:
Since Bitcoin is by far the oldest and most tested blockchain of all, it is probably also the safest in terms of any programming errors and risks.
And since DeFiChain is a fork of Bitcoin, so built on Bitcoin’s code, DeFiChain also offers exactly this secure foundation of the proven Bitcoin code.
Overall, it can be said that a possible risk of a critical error in the programming could well exist — but is negligible compared to many other projects, since DeFiChain is built on Bitcoin itself.
Risk: A manipulation of the blocks
One risk that is generally present in every blockchain is the risk of malicious manipulation of the blocks.
Since blockchains work democratically according to the 51% principle — meaning that the majority has the right to decide and thus determines what is entered in the blocks and what is not — a malicious attacker could try to gain 51% of the computing power (hash rate) and thus manipulate the blocks in his favor.
Practically, the successful implementation of such an attack is almost impossible with a truly decentralized blockchain like Bitcoin or DeFiChain.
There are simply too many full nodes (i.e. “block validators”) in the DeFiChain network, which makes such an attack almost impossible. In this independent dashboard you can see the distribution of DeFiChain full nodes worldwide — as you can see, a 51% attack is practically impossible.
To further strengthen the security of DeFiChain, the community also regularly performs a so-called “Bitcoin Anchoring” — i.e. an anchoring of the DeFi Blockchain into the Bitcoin Blockchain.
This means that even with the risk of manipulation of the blocks — just as with the risk of a bug in the code — DeFiChain benefits from the high security of the Bitcoin blockchain itself.
Risk: The platform on which you hold your coins
As with any investment in general, you are also exposed to a platform risk when investing in DeFiChain.
Overall, however, it can be said that you have a comparatively lower risk here, simply because you have more options available than with a traditional investment. Instead of having to trust a central platform, you also have the option to hold your investment in your own hands.
What matters is how/where your private key (the password to your cryptocurrencies, so to speak) is stored. There are two main options here:
- On a centralized platform, such as a traditional exchange or also a company like Cake DeFi, which offers various financial services in the field of cryptocurrencies — including the staking of the DFI Coin for returns of currently over 90% per year. Here, your Private Key is held for you by the respective company.
- A completely decentralized storage, for example on the DeFi Wallet developed by DeFiChain. This also offers decentralized trading, liquidity mining, or — if you can deposit at least 20,000 DFI as collateral — also staking of the DFI Coins for currently over 90% per year. Here you are the only one in possession of your private key and therefore do not have to trust any central platform. On the other hand, you are also solely responsible for the safekeeping of your private key.
Keeping your private key yourself is technically more complicated and a big responsibility. For beginners, the use of a centralized platform is therefore recommended for the first time. If you have already gained some experience, it is also a good idea to slowly approach decentralized storage options.
Risk: High volatility due to speculation (& high liquidity)
The fourth and final risk is the high volatility of the DFI Coin, but this is also a reality with most other cryptocurrencies.
Even in the case of the largest cryptocurrency by far — Bitcoin — volatility in the range of 20–30% up and down is nothing out of the ordinary. This is remarkable given that Bitcoin has a market capitalization of more than $1.1 trillion, and the eighth largest market capitalization among all assets (see figure).
This still relatively high volatility can be explained by the fact that Bitcoin — just like DeFiChain, or any other cryptocurrency — is still a completely new and unknown asset class for most investors, and is therefore considered more speculative and risky than other investments.
This is also the reason why many investors are only moderately convinced by cryptocurrencies and often sell their positions again without much hesitation precisely because of the fear of a potential “crash”. Due to the high liquidity of Bitcoin and DeFiChain, this can be done very easily and does not take more than a few minutes.
However, the same is true the other way around: as soon as cryptocurrencies like Bitcoin or DeFiChain start to rise, euphoria often sets in and many investors buy this “new asset class with high potential”.
A short-term volatility of 20–30% both downwards and upwards is therefore completely to be expected with DeFiChain, and can represent a risk especially if you as an investor have to sell on a certain date, regardless of the short-term price development.
However, if you invest for a longer term and have the freedom to choose when and if you want to sell or not, the short-term volatility is negligible — the only thing that counts in this case is the long-term direction. And as described in the beginning, it is to be expected that this will be quite positive.
Considering the enormous upside potential and the relative risks, it certainly makes sense to invest part of your portfolio in the DFI Coin — especially if you are still looking for an investment that can rise very strongly.
However, as always with investments, one should not put all of one’s capital into one thing, but diversify broadly. The DFI Coin is perfectly suited to build up a small position that can become a “home run” — i.e. bring an incredibly high return — or, as explained in the risks, lose its value in the worst case.
If you are now wondering how and where to invest in DFI Coin, here is a guide on how to invest in DFI.