Finding Yield in Crypto, DeFi, and Stablecoins
Yield refers to the income you earn on an asset. Most assets generate yield. But Bitcoin, stablecoins and DeFi coins are generating far more yield. In this video, we unwrap what yield is, how it’s important in traditional assets, and even more so in cryptocurrencies.
Before we begin, we should note that when we say yield we do not mean yield farming. In 2020, several DeFi coins touted high percent yield, infinite yield and fruitful yields. Many of them turned out to be risky investments. We aren’t talking about this. We are talking about the yields that investors receive on their legitimate and safe crypto investments.
In the traditional sense you can compare this to interest rates on bonds and dividends on stocks. Bonds carry something called a ‘coupon rate’ which means a regular annual interest or income that the bond holders get. Similarly, many companies give out dividends to shareholders periodically. Even real estate investments had a yield attached to them. But the yield on traditional assets dropped when interest rates fell. Following last year’s economic crisis, many countries slashed interest rates to record lows.
Since interest rates fell, the yields on bonds, stocks and real estate investments fell. This forced investors to look for assets that produced higher levels of yields. Can cryptocurrencies provide a higher yield? Yes, through simple and safe avenues.
The simplest way to earn a yield on Bitcoin is to lend it. Companies like BlockFi, and Gemini allow investors to deposit their Bitcoin and receive interest in Bitcoin on it. This can also be done with stablecoins like USD Coin (USDC). These investments generate a higher yield than traditional investments (6-8%). The tradeoff for investors is the yield generated on Bitcoin and USDC carry a credit risk. Since the companies that offer the higher yield on Bitcoin and stablecoin are not insured by the FDIC, it is considered riskier than traditional yield generating assets. Next is volatility risk. Bonds, stocks prices are relatively stable compared to cryptocurrencies. The investor takes on the risk of volatility during the lock-in period.
Other ways to earn a yield is staking and mining. Staking works with cryptocurrencies that follow the proof of stake (PoS) principle. This allows users to stake their cryptocurrencies for network consensus, and earn a yield. Mining involves providing computational resources to contribute towards mining new cryptocurrencies and receiving a reward. However, these involve another layer or risk – technical risk. This refers to the risk involved in learning how the staking and mechanisms work.
These are some ways where Bitcoin, stablecoins and DeFi coins earn regular yield. But before entering into these investments, be aware of the risks that surround them.
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