- There are different strategies to earn additional returns from Bitcoin holdings including centralized (CeFi) or decentralized (DeFi) finance.
- Depending on the strategy, more or less performance can be obtained.
Since November 2021, Bitcoin (BTC) investors have seen no new extraordinary returns on their investment. Certainly, there are many who invested in crypto at some of its all-time lows and their investment continues to show a positive return, but even so, BTC has since the beginning of 2022 fluctuated between $43,000 and $38,000 USD.
Despite its poor performance in recent months, there are investors who continue to bet long on Bitcoin., so to increase their return, they look for ways other than price volatility to make money on their investment. Especially as inflation in the United States tops 7% in 2022.
Earning additional returns from Bitcoin
There are generally two ways to earn interest from Bitcoin: Centralized Finance Solutions (CeFi) or Decentralized Finance Solutions (DeFi).
Briefly, CeFi refers to centralized companies that are guarantors of the execution and success of the financial products they offer. Basically, when a user uses a CeFi platform, they trust the organization behind the platform to store their funds and manage them properly.
Instead, DeFi refers to decentralization, This is because they are products that run on a public blockchain and there are no financial intermediaries because everything is automated in the protocol through smart contracts.
In this way, there are a wide variety of differences between the two, however, probably the question that everyone must ask is: Do I trust more in people or in technology?
Both the institutions behind CeFi and the Smart Contracts behind DeFi have advantages and disadvantages. In Smart Contracts, being long lines of code with conditionals, there are vulnerabilities that can cause investors to lose money and, in the same way, there have always been financial institutions that turn out to be scams or mishandle assets .
Regardless of whether CeFi or DeFi is used, the investigation of the institution or protocol is essential before depositing any amount of money in it and in any case, to acquire BTC through a Fiat currency, it will be necessary to use a CeFi crypto as Binance, Coinbase and Crypto.com.
Ways to Earn Interest on Your Bitcoin Holdings
Usually, there are three ways from which additional returns can be obtained from cryptocurrencies: Crypto Lending, Margin Lending, Liquidity Provider and Staking. However, Staking is for those cryptocurrencies with a Blockchain that uses Proof of Stake (PoS) by consensus. Bitcoin, for its part, uses the Proof of Work, so it is not possible to stake BTC.
Lending holdings in Bitcoin
In both CeFi and DeFi, it is possible to grant BTC holdings as a loan. Like a bank (in the case of CeFi), BTC holders looking to earn additional returns deposit their funds on a platform and it lends these funds to borrowers.
Whereas, in the case of DeFi platforms, the lending operation occurs directly between the two interested parties: the borrower and the lender. And what guarantees that the interests of both are met is the Smart Contract of the protocol in which it is found.
CeFi Options for Bitcoin Loan:
- Celsius Network. Approximately offers an APY between 3.99% and 3.5%
- Binance. It offers returns of up to 5% APY.
DeFi Options for Bitcoin Lending:
When it comes to DeFi platforms, there are usually fewer protocols that support Bitcoin since they are generally found on the Ethereum blockchain, therefore they are often not compatible with the Bitcoin blockchain. Some offer wBTC, which is an ERC-20 token that represents the price of Bitcoin on the Ethereum blockchain.
- compound. Offers an APY of 0.08%
- Aave. Offers 0.01% APY
In particular, in the case of DeFi protocols, lenders’ risk is reduced when borrowers are required to provide high collateral, for example, 150% of the value of the loan.
This allows the lender to guarantee that:
1) if the borrower defaults on the loan, he can liquidate the collateral and recover, and
2) If the value of the cryptocurrency decreases, the collateral can be automatically liquidated to ensure that its value does not fall below the value of the loan.
But, a risk that must always be considered has to do with the Smart Contract. As previously noted, these often have vulnerabilities that, if found by a hacker, can result in losses for lenders and borrowers.
Margin loans with BTC
BTC margin lending is essentially provided by CeFi platforms since it consists of offering leveraged trading to its clients..
When a user uses leverage, they are basically using their assets to obtain a loan that allows them to trade with more money than they have. Why would they do this? Because when multiplying by 5 or 10 the capital with which it operates, the profits also increase. Yes, losses are also possible. All the risks of normal trading apply for leveraged trading.
Being one of the riskiest options to increase returns in Bitcoin, many users prefer to avoid it and, instead of using their money to do this type of trading, they are the ones who provide the money to others to do so. These types of solutions are offered by crypto exchanges such as Bitfinex and Poloniex.
Although the lender certainly does not bear the risk of trading, he still faces other types of dangers.
Crypto exchanges, being centralized solutions, seek to reduce risk for lenders by implementing mitigation strategies. In general, a leveraged trader’s position is forced to liquidate if it falls too close to the collateral margin.
For example, a user trading leveraged has $1,000 USD and opens a long Bitcoin position valued at $5,000 USD at a price of $10,000 USD per BTC. That is, the user leveraged 5x and bought 0.5 BTC. So, if the price of Bitcoin falls to $8,000, the value of the trader’s position is $4,000, i.e. he would run out of capital and any further loss would be the lender’s burden.
That is why crypto exchanges must apply risk mitigation strategies for the lender. Knowing what these are is essential when considering offering margin loans! For example, in the following linkyou can read the risks associated with this activity on Bitfinex.
Liquidity pools
Last but not least, users can earn additional returns on their Bitcoin holdings by being a liquidity provider.
In particular, At the core of DeFi platforms are decentralized crypto exchanges (DEXs); these depend on liquidity funds to be able to execute operations.
At the beginning of DEXes, there were few people who used them to buy and sell cryptocurrencies. Therefore, there was little liquidity and that was a problem.
So, one of the solutions was to create liquidity funds, that is, asset reserves that are deposited by users.
By depositing liquidity in a fund, the user will get a part of the transaction fees, and in addition, they usually get a new token called LP; these types of tokens are distributed proportionally depending on how much the liquidity providers have contributed to the trading pairs.
For example, if you add liquidity on Uniswap for the wBTC/USDT pair, you will earn 0.3% of all trades with this pair proportional to your holding in the fund.
How to find the best performing strategies for Bitcoin?
Certainly, when starting out in the crypto market, it can be overwhelming and mission impossible to find the best strategies to put Bitcoin holdings to work.
That is why there are communities that share this type of information with their users. However, it is essential to remember that no strategy should be followed blindly. It is always crucial to question the veracity and safety of the strategies that are suggested.
ORne of the available options is Bitcoin Yields, or @btcyields on Twitter. Some strategies are posted there to get the most out of your Bitcoin holdings.
For example, this month they reported that on Screamdot and 0xDAO following a series of steps you could get approximately 20% APR on Bitcoin.
They have a community on Discord and on Telegram where they share these types of strategies.
general tips
In this way, there are a series of tips that we must always keep in mind:
- Never deposit in a DeFi protocol or in a crypto exchange of doubtful origin.
- It is always necessary to invest time in researching cryptocurrency platforms and, in the case of DeFi, to ensure that their Smart Contracts are audited by a company external to the platform.
- Determine your own tolerable risk levels.
- Never follow other people’s strategies to the letter. Remember that these strategies are usually made according to the risk preferences of the person who made it. Therefore, a strategy can be highly risky.
- Linked to the previous point, the user must always know the risk of the strategy to follow. Since, once he has it in mind, he can decide how much money to deposit.
- Beware of promises of extremely high returns!
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