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Blockchain believers are convinced that “Web3” will be the new & improved Internet. Rather than trusting centralized companies like Alphabet or Meta, Web3 promises to “decentralize” our online experience. Although Web3 has a long way to go, it’s steadily gaining traction in niches like DeFi and NFTs.
If Web3 supplants Web2, then it could be one of the best investments of this century. Considering all the potential Web3 has, it’s no wonder more people are interested in putting their capital to work in this sector.
Investing in Web3 may not seem as simple as putting money into other fields, but there are plenty of strategies anyone could use to get involved in this emerging market.
What is Web3?
Since “Web3” contains so many concepts, it’s difficult to give a straightforward definition. However, there are a few features that often appear when crypto experts start talking about Web3 innovations.
Basically, Web3 is a decentralized version of the Internet that relies on blockchain technology rather than Big Tech companies. In the current “Web2” model, companies like Alphabet (NASDAQ: GOOGL), Meta (NASDAQ: META), and Amazon (NASDAQ: AMZN) hold the lion’s share of online traffic, which gives them huge influence over the Internet.
Although anyone can post on sites like Facebook or Twitter, they always have to “trust” that company executives won’t censor them. Also, since Web2 uses an ad-based revenue model, most of the profits from user-generated content flow to centralized tech companies.
Web3 advocates want to disrupt this paradigm by building decentralized applications (aka dApps) on top of blockchains like Ethereum. Rather than trusting a company with your data, Web3 users could interact with websites in a trustless and censorship-resistant manner. Blockchain ledgers are open source, decentralized, and immutable, which allows people to create and interact with dApps without worrying about getting censored.
Web3 also promises to generate more value for users thanks to its unique incentives system. Since there aren’t centralized companies controlling dApps — and since cryptocurrencies are inherently decentralized — users could get paid their fair share for participating in the Web3 ecosystem. Innovations like NFTs and non-custodial crypto wallets might help people enjoy ownership of their digital assets.
Understanding Web3 Layers
Explaining Web3 can get super complicated very quickly. If you’re still confused over how Web3 works, it may help to take a closer look at the architecture that makes this technology possible. A brief overview of the “layers” behind the “Web3 stack” may help clear up this complex topic.
You could think of the protocol layer as the foundation for all Web3 dApps. This fundamental layer refers to the “bare bones” blockchain with its cryptographic technology and consensus mechanism (i.e., Proof of Work or Proof of Stake). So, this layer would include popular blockchains like Bitcoin, Ethereum, and Solana.
If you need more info on how blockchains work, be sure to read The Modest Wallet’s guide to “Proof of Stake vs. Proof of Work.”
The infrastructure layer is composed of applications that use the security of the underlying blockchain to perform more advanced functions. The projects on the infrastructure layer can use smart contracts to support features like decentralized token trading, data storage, or governance.
For example, the infrastructure project Arweave provides a secure way for dApp makers to store data without relying on the risks of a centralized cloud company. Another popular infrastructure layer is Lido Finance, which allows people to stake crypto assets like Ether (ETH) in a trustless manner.
While each project in the infrastructure layer focuses on one issue, they are designed to communicate with each other. So, as dApp makers create their final product, they can use as many infrastructure protocols as they need.
Use Case Layer
The final two layers are what most people will interact with on Web3. Indeed, the name “use case layer” highlights this is where you get to “use” an application. These are the sites where you play blockchain games, trade NFTs, or post content.
The access layer is the key that helps link you to Web3 applications. The easiest way to think of this layer is to associate it with your private crypto wallet. Browser extensions like MetaMask and Phantom allow you to interact with dApps. These wallets also store your digital assets and help verify your identity across multiple protocols.
While crypto wallets are central to the access layer, there are other aspects that could qualify for this category. For instance, Web3-focused aggregators like DappRadar can help users “access” various sites. Also, some Web2 platforms are introducing new Web3 functionalities that could be considered “access layers.” Most notably, Twitter introduced cryptocurrency tipping and NFT verification in 2021.
Passive vs. Active Web3 Investing
Now that you understand more about the tech behind Web3, you should consider how you’d like to invest in this sector. For those who aren’t comfortable with a direct investment strategy, you could look into passive opportunities to add some Web3 to your portfolio.
For example, you could look into index funds with Web3 exposure rather than picking specific cryptocurrencies. Passive investment strategies tend to have lower risk & volatility versus a more hands-on “active strategy.” Also, with most passive investments, you won’t have to worry as much about the responsibilities of crypto self-custody.
Of course, since passive investment strategies aren’t as exposed to the Web3 industry, they tend to have diminished odds of returns versus the “right” direct investments. As with any other investment, your investing style depends on your financial goals and risk tolerance.
Ways To Invest in Web3
You don’t need to download a MetaMask to add Web3 assets to your portfolio. Sure, you could invest directly in cryptocurrencies, but there are many “outside the box” ways to buy into Web3.
Crypto is the currency of Web3. Whenever you buy a digital asset like Ether or Bitcoin, you’re betting on the increased prevalence of blockchain technology.
Most Web3 ecosystems rely on digital currencies. So, if you believe in a Web3 project, you may want to consider investing in its native token. As demand for your chosen protocol grows, the price of that token should rise.
Despite layer two solutions like Stacks, Bitcoin isn’t as well known for Web3 applications as layer one blockchains like Ethereum and Solana. On the other hand, Bitcoin has the longest track record in the crypto industry, which provides it with relative price stability versus altcoins. While Bitcoin is still a “high-risk” investment, it’s perceived to be the “safest” option in crypto due to its long history, strong community, and growing status as “digital gold.”
The further you scroll down on crypto price aggregators like CoinGecko, the greater your risk increases. While small-cap cryptos can produce insane returns, these tokens usually trade purely on speculation and hype. By comparison, chains like Ethereum have numerous dApps, a robust developer community, and a well-defined road map for the future.
Please keep a token’s “risk-to-reward” ratio in mind whenever evaluating what to put in your crypto portfolio.
2. Crypto Mining
Theoretically, anyone could mine Proof of Work tokens like Bitcoin. In the early days of crypto, you could have probably minted a few Bitcoins on your home computer. However, now that crypto is a $1 trillion market, it has become unfeasible for average Joes to mine Bitcoin.
Today, crypto mining has become a big industry, and many prominent Bitcoin miners sell shares on the stock market. Even if you buy an ASIC rig, it’s impossible to compete for mining rewards against huge Bitcoin mining farms.
Still, if you’re dead set on earning crypto via mining, you could research adding your machine to a “Bitcoin mining pool” and sharing a percentage of the profits. You could also consider mining less popular Proof of Work chains like Monero, Ethereum Classic, or Bitcoin Cash. While you may still need to enter a mining pool for these altcoins, the rewards might be more lucrative considering the increased likelihood of block rewards.
For most people, investing in a professional mining company’s stock is the easiest way to gain exposure to crypto mining. Unless you have the initial capital and technical know-how for mining, it’s less of a hassle to invest in proven Bitcoin mining farms.
3. Crypto Staking
Blockchains that use a Proof of Stake consensus mechanism allow people to “lock” a percentage of their tokens to earn “staking rewards.” Since you’re helping power whatever blockchain you’re on, the system will reward you with the native crypto.
Most crypto investors will “delegate” their tokens to a validator who stakes them on their behalf. Validators will pass on a percentage of their earnings to your account.
You should be able to natively stake tokens on the blockchain you’re interested in. For instance, Cardano has the Daedalus Wallet to make it easier for people to stake ADA. You could also stake directly on Polkadot, Solana, and Cosmos. If you don’t feel comfortable interacting with Web3 staking, centralized exchanges like Binance could stake on your behalf.
Remember that validators who don’t perform their duties could get “slashed,” which means you could lose your crypto. You should always read as much info on the validator you’re going to work with before sending your crypto for staking.
Investors should also consider their blockchain’s lockup period. Often, you’ll have to wait a few days or weeks to release your funds when you want to unstake them. Always ensure you’ve read the fine details on how your blockchain handles staking rewards, so there are no surprises down the line.
4. Crypto Airdrops
Believe it or not, there are legit ways to get “free crypto.” Many new Web3 projects will “airdrop” their native token or NFTs to people to generate buzz online. In most cases, you will need to perform a few actions to qualify for a crypto airdrop.
For instance, you may need to follow a crypto project on social media or sign up for a newsletter. You should see the airdrop deposited in your associated crypto wallet if you complete these tasks.
Sometimes, airdrops are conditional on whether you hold another crypto asset. For instance, people who held Bitcoin back in the day qualified for a Bitcoin Cash airdrop. Also, after the Terra blockchain cratered, the team gave airdrops of the updated Luna token to people who already had Luna Classic or UST.
While airdrops don’t always turn out to be profitable, they are a possible way you could increase your exposure to Web3.
5. Crypto Lending
If you feel comfortable lending your crypto to a DeFi platform or a centralized company, you could use this strategy to generate passive income. Just bear in mind there are significant risks to loaning out your crypto. Recently, many centralized lending platforms like Celsius and Voyager declared bankruptcy, and some DeFi protocols like Terra’s Anchor suffered devastating bank runs.
While it’s possible to generate yield by lending your crypto, you must feel confident that your platform will act responsibly. Once you hand over your crypto to another entity — centralized or decentralized — it’s not wholly within your control. Please understand the risks inherent in crypto lending before using this strategy.
6. Invest in ICOs
Initial coin offerings (ICOs) were all the rage back in the 2017 bull run, and many promising projects still offer ICOs to early investors. Since you’ll get in at the “ground floor” with these tokens, it can be tempting to take advantage of all the ICO offers you run across in Web3.
However, it’s challenging to determine a well-run crypto project from a scam. Unfortunately, “ICO rugpulls” are common in the crypto industry, so you must be extremely careful if you’re considering an ICO.
Always do plenty of research on a crypto project’s team and roadmap before thinking about getting involved in an ICO. Ideally, everyone in the ICO you’re looking into is doxxed and has a coherent vision for their future.
Also, when investing in ICOs, be sure you understand you’re investing in unproven teams & technologies. ICOs can be incredibly lucrative, but they could be worthless. Please invest in ICOs with full awareness this is a high-risk strategy.
Even though NFTs were around in the mid-2010s, they didn’t pick up steam until the 2021 bull run. Today, it’s hard to find people who haven’t heard of hot NFT collections like the Bored Ape Yacht Club.
Unlike fungible cryptocurrencies like Ether, NFTs are unique “digital signatures” that may grant holders special perks, IP, or ownership rights. Although NFTs are often associated with animated profile pics, they can represent anything from pro sports clips and albums to video game avatars and backstage passes.
While some people collect NFTs for fun, you could invest in projects you believe in and hope their value will increase over time. Just remember that NFTs are one of cryptocurrency’s most speculative asset classes. Even “blue-chip” projects are subject to wild price swings, and it’s difficult to gauge how valuable NFTs are since they don’t trade on the spot market.
To learn more about the pros & cons of NFT investing, you should check out The Modest Wallet’s 101 guide to NFTs.
8. Metaverse Real Estate
Metaverse real estate is often lumped in with NFT investing. If you want to buy virtual land in a game like The Sandbox or Otherside, you usually have to buy an “NFT deed.” Once you have a land NFT in your wallet, you could develop whatever you want on your virtual property or re-sell it.
Just like land in the “real world,” the value of virtual land depends on its location within its respective metaverse. For instance, the land near Snoop Dogg’s estate in The Sandbox sold for more than an obscure plot of land. The desirability of a land NFT also depends on the popularity of your chosen metaverse.
You could potentially make your land more valuable by developing it. Many prominent celebrities and organizations are building virtual theaters, amusement parks, and casinos to generate revenue. Depending on what game you invest in, you might be able to “rent” your virtual property to other players and earn passive rewards.
While virtual land sales have increased dramatically since the 2021 bull run, please remember that NFTs should be a part of your “high-risk” portfolio. Real estate can be a great way to make money in the metaverse, but it’s not the only way.
9. Web3 Stocks
As much as Web3 purists would like to keep Big Tech out of the new decentralized Internet, plenty of companies are interested in getting involved in this nascent movement. For instance, Google parent Alphabet recently announced it’s working on Web3-focused functions in its Cloud division. Plus, Facebook parent Meta has gone “gung-ho” for Web3 technologies like NFTs.
The list of stocks with some Web3 exposure is endless, but most will be in the tech-heavy NASDAQ exchange. If you invest in any Big Tech companies included in the “FAANG” acronym, you’ll probably get some Web3 exposure.
Here are some prominent stocks that have exposure to crypto and Web3:
- Alphabet (NASDAQ: GOOGL)
- Meta (NASDAQ: META)
- Microsoft (NASDAQ: MSFT)
- Apple (NASDAQ: AAPL)
- Tesla (NASDAQ: TSLA)
- Shopify (NYSE: SHOP)
- NVIDIA (NASDAQ: NVDA)
- AMD (NASDAQ: AMD)
- Intel (NASDAQ: INTC)
- Coinbase (NASDAQ: COIN)
- PayPal (NASDAQ: PYPL)
- Block (NYSE: SQ)
- MicroStrategy (NASDAQ: MSTR)
10. Web3 ETFs
If you don’t feel comfortable picking individual Web3 stocks, you may want to look into ETFs that track this emerging sector. Since ETFs aren’t concentrated on one business, they usually aren’t as volatile as investing in single companies.
Currently, Fidelity is one of the largest asset managers to offer crypto-related funds with its Crypto Industry and Digital Payments ETF (NASDAQ: FDIG). Interestingly, Fidelity is so bullish on the metaverse that it bought land in the game Decentraland and offers a metaverse-related ETF (NASDAQ: FMET).
The mobile-first bank SoFi also announced a Web3 fund called the Solactive ARTIS Web 3.0 Index. Interestingly, Bitwise revealed a Blue-Chip NFT Index Fund that gives investors exposure to NFT projects like the Bored Ape Yacht Club.
If you’d prefer less direct exposure to Web3, you could also consider more traditional tech ETFs like the Invesco QQQTrust Series 1 ETF (NASDAQ: QQQ). There are also ways to invest in Bitcoin’s price action through Bitcoin Futures ETFs.
If you’re new to investing in ETFs, we recommend checking out The Modest Wallet’s previous post, “How to Invest in ETFs.”
11. Private Markets
Investing in private Web3 companies isn’t as simple as logging into a brokerage account, picking a stock, and clicking “buy.” Since these Web3 companies have yet to list on the public market, you’ll need to trade on an alternative platform or work directly with a financial advisor. There may also be crypto venture capitalist firms that you might be able to participate in.
Today, sites like EquityZen and EquityBee give retail investors access to pre-IPO companies. You could also research a few alternative IRA platforms like Alto IRA that grant clients exposure to venture capital and crypto-related investments.
If you’re having difficulty finding a private Web3 project you want on these platforms, it’s best to talk with a financial advisor. Investing in the private markets may be more challenging for retail investors, but there are opportunities if you’re dead-set on this strategy.
12. Dividend-Paying Tokens
A few cryptocurrencies reward holders with regular dividend payments just as you would receive from specific stocks. Often, these dividend-paying tokens are associated with a crypto company that rewards holders with a percentage of its profits at regular intervals. Two of the most famous crypto exchanges that offer dividend reward tokens are KuCoin and FTX.
Please remember that these dividends aren’t the same as staking rewards for Proof of Stake cryptocurrencies. The interest you get from staking cryptos like Polkadot come from network fees rather than “profits” from a centralized company. Often, dividend crypto tokens are associated with centralized companies.
13. Invest in Microchips
Microchips are indispensable for contemporary computerized civilization. Even if Web3 doesn’t take off, microchips will remain necessary in countless industries such as cybersecurity, data storage, and cloud computing.
For those who want to take a conservative approach to Web3 investing, you may want to put more funds into prominent chip manufacturers. You could invest in companies like NVIDIA (NASDAQ: NVDA), or you could look into microchip ETFs like iShares’ Semiconductor ETF (NASDAQ: SOXX), VanEck’s Semiconductor ETF (NASDAQ: SMH), or Invesco’s Dynamic Semiconductors ETF (NYSEARCA: PSI).
14. Play To Earn Crypto Games
Yes, there are ways you could earn crypto by playing video games. Indeed, one of the major selling points for blockchain-based gaming is its “play to earn” feature. Not only could you earn crypto as you get better at a game, but you could also pick up potentially valuable in-game items in the form of NFTs.
You probably can’t quit your day job by collecting crypto from games, but it’s a nice perk for people who already enjoy gaming.
Currently, the most popular title in the “GameFi” sector is Axie Infinity, which is very similar to Pokémon. You could also earn crypto rewards for completing quests or taking part in events in metaverses like The Sandbox and Decentraland.
Even if you don’t want to play GameFi titles, you could invest in the tokens associated with promising projects. Every metaverse or Web3 game has tokens or NFTs associated with it, which makes it easy to bet on games you feel will be popular in the future.
Platforms like Enjin and Gala Games have proprietary cryptos for their GameFi ecosystems. Bored Ape founder Yuga Labs also released ApeCoin (APE) for its upcoming metaverse “Otherside.”
Benefits of Investing in Web3
The primary benefit of investing in Web3 is that this industry is so new. Web3 believers often compare investing in today’s crypto projects with buying FAANG stocks in the early 2000s. Since Web3 is in its infancy, it has greater upside potential than established Big Tech companies.
Also, many people genuinely believe in the ideals of Web3. Investors who feel a decentralized Internet provides people with greater autonomy have no qualms putting their money into Web3 projects.
Downsides of Investing in Web3
Ironically, the biggest downside of investing in Web3 is the same as its top benefit: This industry is so new. While investing in innovations before they go mainstream could be rewarding, you’ll have to stomach more volatility. Not every investor may be in a position to ride out the extreme price swings crypto is known for. Plus, there’s no telling which Web3 projects will survive, especially if you invest in small-cap tokens.
Even though Web3 has noble values, some scammers are taking advantage of this new technology. It’s not unheard of for shady projects to “rugpull” retail investors. There are also plenty of stories of hacks and phishing attacks in this space. Those investing in early-stage Web3 projects need to be extra cautious about who they interact with and how they store their crypto.
FAQs on How to Invest in Web3
Do you still have concerns about putting your money to work in Web3? Hopefully, the FAQs below will address any lingering questions you may have.
You should invest in Web3 if you believe blockchain technology will improve the Internet. People who support a decentralized Internet will have the easiest time jumping into Web3.
You should also consider investing in Web3 because it’s at the cutting edge. Nobody knows where Web3 will go in the future, but investing in new technologies can be incredibly lucrative. Plus, since there are so many projects and companies in the Web3 ecosystem, it’s getting easier to customize your Web3 position to suit your risk tolerance.
Many people use the phrases “read-write” and “read-write-own” to differentiate Web2 from Web3. In Web2, users can “write” on top of applications like Facebook, but they don’t “own” their content. Instead, the companies behind the websites we use own all the data and content we produce.
By contrast, Web3 dApps run on blockchain technology, which does away with centralized platforms. Web3 runs on code and smart contracts, and it doesn’t ask users for KYC to interact with a protocol. If you have a crypto wallet, you should be able to use a Web3 application without fear of censorship. Plus, since cryptocurrencies and NFTs are verifiable on the blockchain, users should have greater control over whatever revenue they earn from content on Web3.
Since Web3 is still in its early stages, many of these proposed benefits are being tested. However, the hope is that Web3 will eliminate the centralized & corporate Web2 we’re currently using.
It’s possible that Web3, and blockchain technology could decentralize the Internet. Indeed, the main goal behind crypto projects like Bitcoin and Ethereum is to provide valuable financial and social tools that don’t rely on central authorities. The transparency of Web3 projects can potentially create a new “trustless” incentive structure that may disrupt Web2.
Since Web3 is in its experimental phase, it’s often likened to the “Wild West.” Sure, there are many successful Web3 projects, but nothing has grown to the size of sites like Amazon, Facebook, or Google. Also, there are plenty of hackers exploiting weaknesses in new Web3 projects.
Still, Web3 advocates would argue there are significant security concerns under the Web2 model. For instance, is it “safe” that companies like Meta, Alphabet, and Apple hold so much personal data? Is it “safer” to trust corporations to handle this data responsibly, or should we rely on blockchain technology?
Yes, there are security concerns in Web3, but there’s also a promise that it could provide people with greater privacy and control. It all depends on how much you believe in the potential of blockchain.
Web3 may become an increasingly prevalent part of our lives. Even though Web3 has yet to eclipse the current Web2 model, there’s a ton of energy and talent funneling into this new decentralized version of the Internet.
For those interested in the Web3 revolution, there are countless ways you could put your money to work today. Take your time exploring various Web3 investment strategies to decide what works for you.
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Eric Esposito is a freelance writer, editor, and cryptocurrency enthusiast. Although it took him a few years to grasp the Bitcoin revolution, Eric has become a crypto convert and long-term “hodler.” Besides crypto investing, Eric is interested in helping others understand how to safely stack sats with passive income opportunities.