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Invest in Compound in 2022

Last updated 22nd Sep 2022
Disclosure

Compound is a decentralized finance (DeFi) lending protocol that allows users to earn interest on their cryptocurrencies by simply depositing into specific pools supported by the platform.

We are going to take a deep dive into the world of Compound and show you exactly how all of it works and what you need to look out for.

Best way to invest in Compound in 2022

There are many ways through which you can begin your journey when it comes to investing in Compound (COMP).

To make things a bit easier for you and to help you determine which option is suitable for you, we have created a list of the best options we have found thus far so you can get up and invest in Compound today.

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What is Compound?

Compound is software that runs on Ethereum with the main goal of incentivizing a distributed network of computers to operate a traditional money market. It uses multiple crypto assets with the goal of providing this as a service and enables lending as well as borrowing, which is required without the usage of a financial intermediary such as a bank for example.

Compound allows users to deposit cryptocurrencies into lending pools that borrowers can access, and then they can earn interest on the assets they deposit. Compound had a market cap of $2,064,641,718, with a circulating supply of 6,018,895.26 COMP tokens at the time of writing.

Pros

  • Users are given the opportunity to generate profits without needing to make large investments.

  • Users can trade cTokens at any time and receive 5% on liquidations

  • Compound offers fair governance

Cons

  • The volatility of cryptocurrencies can cause issues for lenders as borrowers

  • The DeFi ecosystem can be vulnerable

How does Compound work?

There are two types of users within the Compound network. First, there are the lenders, which represent anyone who wants to lend a cryptocurrency on the platform. They can send their tokens to an Ethereum address which Compound controls to earn interest. Second, there are the borrowers. Borrowers post collateral on Compound in the form of cryptocurrency to borrow the cryptocurrencies which Compound supports.

When a user makes a deposit in a Compound pool, Compound awards a new cryptocurrency token called the cToken to the user. This token represents the deposit to the lender. Examples of these cTokens include cETH or cBAT. Every cToken can be transferred or traded without restriction. However, these tokens are only redeemable for the cryptocurrency which was initially locked within the protocol to begin with.

With the goal of incentivizing such activities, Compound uses another cryptocurrency known as the COMP token. Every time a user ends up interacting with the market of Compound, through the process of borrowing, withdrawing, or repaying, they are rewarded in the form of COMP tokens.

That said, lenders can take out a loan in any other cryptocurrency offered, up to the amount of collateral they have posted. Borrowers can get liquidated if their assets increase in value or become more valuable than the originally posted collateral.

Ways to buy Compound

There are many methods that will allow you to purchase the Compound (COMP) token online easily. That said, below are some of the best options you have to pick from. You can use cryptocurrency exchanges, CFD brokers, P2P marketplaces, or in-person trading.

  • CFD Brokers: A contract for different (CFD) brokerages will allow you to buy the COMP token. CFD brokerages allow for an agreement between you, the investor, and the broker to exchange the difference in the value of a financial product between the time the contract opens and closes. In this case, that is the CFD token. In other words, the brokerage sets the price for the COMP token.

  • Cryptocurrency Exchanges: In cryptocurrency exchanges, the market is what sets the price of the cryptocurrency token. In this case, that is the the COMP token, and as such, you will be buying the token from the open market. The main way through which exchanges stand out is through the use of specific charting tools that are a lot more advanced. They also have additional features that are made available to their traders.

  • P2P Marketplaces: P2P or Peer-to-Peer Marketplaces provide you with the opportunity to buy or even sell the COMP token directly with another trader. This means that you need to connect with someone directly through the usage of these marketplaces.

  • In-Person Trading: This is a type of trading method where you are trading with another person face-to-face. They send the COMP tokens to the cryptocurrency wallet address you give to them directly.

Here is everything you need to know about buying Compound (COMP):

  • Create Account: You can start by first creating an account on your favorite cryptocurrency brokerage or exchange, specifically one that meets your specific standards in regards to the fees it has, the regulatory requirements, and the token availability it implements.

  • Fund Account: Additionally, you need to fund your account through using FIAT methods, assuming you do not already have a cryptocurrency wallet with some cryptocurrency in it. If you do, you can use that instead.

  • Buy COMP Tokens: In this step, you will simply need to look up the Compound (COMP) token on the exchange or brokerage in question through using the search bar. That said, once you do, you should find and click on the “Buy” option, after which you can confirm the transaction.

How to invest in Compound

You can outright purchase the token and hold onto it for a prolonged period of time for a potential profit when you sell it long-term. You do not need to buy the token directly to trade it. Through COMP trading, you can speculate if the price of the token will go up or down without actually owning it yourself. It is important that you utilize short-term as well as long-term strategies efficiently and take advantage of margin and leverage trading as much as you can. Make sure that you take advantage of entry orders, stop losses, profit-limit orders, and risk-management methods.

Below are the different options you can pick from:

  • Brokerages: Cryptocurrency brokerages are quite possibly one of the best ways through which you can enter the world of cryptocurrencies for the very first time and buy the Compound (COMP) token. This is due to the fact that they provide you with a simple-to-use user interface and are fairly easy to deposit funds into due to the fact that they support a wide range of deposit options.

  • Exchanges: Exchanges, on the other hand, are a lot more interesting in terms of what they have on offer due to the fact that they typically list a lot more tokens, they have a built-in cryptocurrency wallet, and they offer advanced charting tools that will help you keep yourself in the cryptocurrency loop a lot easier.

  • ETFs: You can also invest in the Compound (COMP) token through the usage of ETFs.

  • Index Funds: There are even index funds that support the Compound (COMP) token as well.

  • Mutual Funds: You can also invest in Compound (COMP) through a mutual fund if you do not want to own the token directly.

  • Trusts: There are even trusts out there that will hold COMP tokens for you and where you can trade your shares of the token instead of the token itself.

  • Apps: There are numerous applications out there that will provide you with access to a direct route through which you can purchase the Compound (COMP) token.

Is it safe to invest in Compound right now?

Investing in cryptocurrencies can be risky, especially if you are just starting out. Even Compound (COMP) is a volatile cryptocurrency, which means that its value is unpredictable and could either increase or decrease dramatically at some point in the future. That said, the token is an interesting investment if you want to dip your toes into the world of cryptocurrencies for the very first time.

In terms of security, Compound offers the best security through regulated brokerages or exchanges, implementing SSL certificates, using Two-factor authentication procedures or biometric authentication, and storing your funds in cold storage devices.

Khashayar Abbasi

Khashayar Abbasi

Khashayar discovered Bitcoin back in 2014 and has since spent countless hours researching the different use cases of cryptocurrencies. He has a bachelor's degree in International Relations and has been a writer in the financial services industry for nearly half a decade. In his spare time, Khashayar enjoys photography, cycling, and ice skating.