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Is Compound Crypto a Good Investment

December 6, 2022
min. read

What is Compound crypto token? Compound (COMP) is a native governance token in the Compound lending protocol on the Ethereum blockchain. The COMP token is paid out as a reward to the users of the Compound Finance service. At the peak of the speculative hype in May 2021, COMP rose above $900 per coin, whereas today (Q12023) it is balancing around $40. An over 20-fold drop is a common phenomenon for the crypto industry, where coins typically soar some time after launch, and then bounce back to a relatively fair value (if the project is really worth something).

The Compound project is an important event in the crypto industry, so it’s not surprising that while everything was growing, the interest in the token was off the charts. At the same time, a 20-fold drop does not mean that the project has lost its attractiveness, but simply reflects the general mood on the market, which has lost capitalization during the long crypto winter.

What is Compound?

Compound Finance is a lending protocol with floating rates generated algorithmically depending on the supply/demand ratio. Users can place their funds in the protocol and earn passive income in accordance with the proposed rate, or borrow the necessary crypto assets against a collateral.

The Compound platform was created by web developer and financial analyst Robert Leshner and programmer Geoffrey Hayes, graduates of the University of Pennsylvania. At the end of August 2017, they registered the Compound Labs company, raising more than $8 mln in investments from fairly well-known players.

In the first version, introduced at the end of 2018, only five coins (including ETH) could be borrowed. The Compound governance token was released in early 2020. COMP holders can influence the project, which makes the token increasingly more decentralized in the development process.

Nevertheless, the desire for decentralization did not save Compound from accusations of selling unregistered securities - at the end of 2022, a respective lawsuit was filed against the company from offended users who stated that their investments were made under the influence of false and misleading statements of the defendant.

How does Compound work?

A feature of the Compound platform is a liquidity pool for lending - users do not interact with each other, but do interact with smart contracts, which excludes third-party intervention. The protocol does not offer any specific deadlines - the user can borrow and return funds at any time. If the value of the borrowed assets has grown critically, the debt position will be forcibly closed - the protocol will sell your collateral coverage.

Annual interest rates in the Compound lending protocol are a function of liquidity. The rewards to the user who supplied the liquidity are paid out with each new Ethereum block (approximately once every 15 seconds) in accordance with the annual rate. 2880 COMP tokens are distributed daily among users in proportion to the share of their participation. COMP is automatically transferred to the user's address in increments of at least 0.001 coins. 

COMP’s total offer is 10 million coins issued by developers, and not as a result of mining. Any holder of 100 thousand COMP can offer their options for project development and put the initiative to the vote. The support of 400,000 votes is required to implement a proposal.

Compound technical analysis

Technical analysis in relation to cryptocurrencies works exactly the same as in the case of any other assets - it helps beginners to believe in a bright future, and analysts - to write analytical articles, while a narrow group of interested parties earns on inside info. Nevertheless, you can play around with technical analysis as part of emerging trends, for example, the exit from the crypto winter, which began in the second half of 2022.

Compound_USDT chart

In this sense, the COMP token is no different from any other crypto asset and will definitely grow if Bitcoin keeps growing. In general, the COMP has no speculative value, since the Compound project is already past its peak. However, who are we to say that it won’t get a second wind, and if the project team manages to somehow inspire the crowd again, we may see a strong, but short-term upward movement.

Fundamental factors do not allow us to be optimistic about DeFi, especially about financial services like Compound. The SEC will consistently label PoS assets and other quasi-decentralized coins as securities, and COMP looks very vulnerable.

Compound price forecasts (5-10 years)

Is Compound crypto a good investment? Of course, like any other project, Compound will always have a bunch of fans who are holding COMP to the last (even after all conceivable local peaks, unambiguous technical analysis signals and other signs of fate). Especially for them, there are many forecast sites on the Internet, where the future rate will be indicated in the table next to the year with the utmost precision, e.g., up to two decimal places: 2034 - $893.71 (!) We can only say one thing about resources of this sort: we are what we consume. 

When assessing an asset’s medium-term prospects, especially in the crypto industry, one should first turn to fundamental factors and examine the worst of them. While lending protocols are not in the direct line of fire from the regulators, if something is destined to change here, it will only be for the worse. The probability that in 5-10 years the COMP token will completely lose its value is still much higher than that of it being listed in the TOP 20.

Bitcoin is the last thing that may disappear in the event of a total collapse, since history shows that power players do need it for their purposes, and the regulator accepts it as something other than a security. Meanwhile, COMP can only be recommended as a long-term investment if it’s a small part of an extensive and rather risky portfolio of utility tokens, which will periodically soar, stagnate, disappear and be replaced by new ones.

Is Compound crypto a good investment? FAQ:

Is it good to invest in Compound cryptocurrency?

Compound is not a cryptocurrency because it does not have its own blockchain - it is an ERC-20 token on the Ethereum blockchain. When investing in COMP, consider the state of the entire crypto lending segment, the current attitude of the regulator (SEC), the market cap relative to other lending tokens, and any other factors that seem important to you and that you are used to paying attention to. 

Is Compound crypto token a good investment 2023?

In 2023, the issue of the end of the crypto winter is highly likely to be resolved, and all tokens and cryptocurrencies may grow as a result, but there are more attractive tokens than COMP among them. Investments in Compound can be recommended only as a small part of an extensive and rather risky portfolio of utility tokens.

Is Compound crypto token safe?

As long as the regulator (SEC) is not concerned specifically with lending protocols, investments in COMP can be considered relatively safe, but you need to understand that no one will warn you in advance if the situation changes.

Does Сompound crypto token have a future?

Compound Finance is a project with a future because it is based on a great idea - the possibility of rapid cryptocurrency lending. The future will depend on the efforts of the project team and the attention of regulators.

What is auto-compounding crypto?

In general, the auto-compounding of crypto assets has nothing to do with the Compound token, although it should be recognized that this is a very appropriate name for the lending protocol. Reinvesting the interest allows you to earn compound interest and achieve maximum profit from the principal amount. 

Minto is an appropriate example of a platform offering auto-compounding. The Minto mining project allows you to enable the Autofarming option and earn compound interest by owning a hashrate of the Minto mining farm.

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