It is important to understand that Bitcoin is not designed to generate a return. 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 return like traditional investment instruments such as bonds or stocks.
However, new and exciting developments in the cryptocurrency space enable the generation of returns through decentralized finance (DeFi) protocols. These protocols offer new financial products and services based on blockchain technology, such as yield farming, staking and liquidity provision.
These activities may involve rewards for participants, such as interest payments or symbolic incentives.
In today’s edition of Ask CryptoVantage, we’ll explore whether it’s possible for Bitcoin investors to generate returns on their Bitcoin holdings.
Table of Contents:
What is yield?
DeFi uses the term yield, but it can mean interest anyway. You can compare the returns with the interest you receive from the hard-earned money you’ve deposited into your traditional financial bank’s savings account.
There are three main ways to generate return in the world of cryptocurrencies:
- Staking
- Liquidity extraction
- Lending your assets
Check out this article for more details on how to earn yield through staking, cash mining, and lending.
How can you earn yield on Bitcoin?
There are several ways to earn yield on Bitcoin.
One of the most established ways to earn a possible return 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, so it is important to choose a reliable 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 liquidity risks, so it’s important to understand the underlying protocols and potential for loss.
You can also choose the option of a loan secured by Bitcoin. 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 that you can receive a loan, while 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-secured loan to buy a variety of different crypto coins, diversify your portfolio, or achieve other financial goals.
Whichever way you choose to embark on your return generation journey, it’s important to note that all of these return-generating activities involve risk and should be carefully researched and understood before you attempt. It is also wise to remember that past performance is no guarantee of future results.
This brings us to the question of whether you should attempt to generate a return on your Bitcoin holdings.
Should you look for a return on Bitcoin?
While we understand the hunt for generating a return on your Bitcoin holdings, the events of 2022 (FTX, Celsius Network, BlockFi crash) have shown that chasing those returns isn’t always worth the risk. After all, there is liquidity risk, price volatility risk, platform risk, regulatory risk, and so on. A lot of risks that can melt your brain and set your wallet on fire, and not in a good way.
So ask yourself, why would you risk a poor asset that is appreciating by an average of 50% each year over the past five years for a meagre single-digit return?
Bitcoin
has proven that simply holding your precious Bitcoin exchanges increases your purchasing power over time and that there is no need for return since you just need to hold your BTC coins.
Lending your Bitcoin puts it at risk. Holding it in a cold wallet until the next raging bull market does not.
Conclusion: Don’t get greedy
While Bitcoin itself does not generate a return, there are many new opportunities in the DeFi space that can provide yield generation opportunities for your Bitcoin holdings. However, it is crucial to research and fully understand the potential risks and rewards before investing in these types of return-generating activities.
Always make sure to diversify your portfolio and don’t put all your eggs in one basket.
