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Ask CryptoVantage: Will Bitcoin Ever Provide a Yield?
It is important to understand that Bitcoin is not designed to generate a yield. The number one cryptocurrency can be used as a store of value and as a medium of exchange, but it does not provide any intrinsic yield like traditional investment instruments like bonds or stocks.
However, new and exciting developments in the cryptocurrency space allow for yield generation through Decentralized Finance (DeFi) protocols. These protocols offer new financial products and services that are built on top of blockchain technology, such as yield farming, staking, and liquidity provision. These activities can result in rewards for the participants, such as interest payments or token incentives.
In today’s edition of Ask CryptoVantage, we will explore whether it is possible for Bitcoin investors to generate yield on their Bitcoin holdings.
What is Yield?
DeFi uses the term yield, but it can mean the same as interest. You can compare yields with the interest you receive from the hard-earned cash that you deposited in your traditional financial bank’s savings account.
There are three major ways to generate yield in the world of crypto:
- Staking
- Liquidity mining
- Lending your assets
Take a look at this article for more details on earning yield through staking, liquidity mining, and lending.
How Can You Earn Yield on Bitcoin?
There are several ways to earn yield on Bitcoin.
One of the more established ways to earn a possible yield on Bitcoin is to lend your Bitcoin to other crypto investors through a peer-to-peer lending platform and earn interest. However, there are always substantial risks of default involved, so it’s important to choose a reputable lending platform and diversify your loans.
You can also participate in yield farming, which is a process of providing liquidity to decentralized exchanges and earning rewards in the form of tokens. Yield farming involves taking on liquidity risk, so it’s important to understand the underlying protocols and the potential for loss.
You can also choose the option of a Bitcoin-backed loan. This is a type of secured loan where your Bitcoin holdings are held as collateral by the one who lends you the desired amount of money. This means you can receive a loan, while still retaining ownership of your Bitcoin. With a BlockFi loan, for example, you can borrow up to 50% of the value of your Bitcoin. In turn, you can use this crypto-backed loan to buy a variety of different crypto coins, diversify your portfolio or meet other financial goals.
Whichever way you choose to go on your yield-generating journey, it is important to note that all of these yield-generating activities carry risks and should be thoroughly researched and understood before attempting. It’s also wise to remember that past performance is not a guarantee of future results.
This brings us to the question of whether you should attempt to generate a yield on your Bitcoin holdings.
Should You Seek a Yield on Bitcoin?
Although we understand the chase for generating a yield on your Bitcoin holdings, the events of 2022 (FTX, Celsius Network, BlockFi collapse) have shown that chasing those yields isn’t always worth the risk. After all, there is liquidity risk, price volatility risk, platform risk, regulatory risk, and so on. Plenty of risks that can make your brain melt, and set your portfolio on fire, and not in a good way.
So ask yourself, why would you risk a scarce asset that is appreciating on average 50% each year over the last five years for a meager single-digit yield?
Bitcoin has shown that simply holding your precious Bitcoin bags increases your purchasing power over time and that there is no need for yield since just holding your BTC coins suffices.
Lending out your Bitcoin puts it at risk. Keeping it in a cold wallet until the next raging bull market doesn’t.
Conclusion: Don’t Get Greedy
While Bitcoin itself does not generate a yield, there are plenty of new opportunities in the DeFi space that may provide yield-generating opportunities for your Bitcoin holdings. However, it is crucial to thoroughly research and understand the potential risks and rewards before investing in these types of yield-generating activities.
Always make sure to diversify your portfolio and don’t put all your eggs in one basket.
