No, we aren’t talking about crop yield, but a financial buzzword that is synonymous with investment returns. Yield is a measure of how much an individual earns from holding onto a particular asset in percentage terms. Used sometimes interchangeably with interest, it is all about finding an asset that brings you the greatest returns.
Is the digital assets market your best bet for generating higher yield? Let’s find out.
Banking on Crypto
Traditionally, the safest place to store your funds is probably your nearest local bank that gives you approximately 0.01% to 0.6% on your basic savings account, rates varying from bank to bank. In pandemic-ridden times, conventional banks are going a step further to pursue lower or even negative interest rates.
Juxtaposing this with the digital assets market where cryptocurrency such as Bitcoin offer 6% annualized yield and more, the temptation to make the shift away from conventional banks has never been as great as the present.
Yield Farming, Yes?
After a blockbuster of a year for DeFi in 2020, another dimension to generating high yields was offered to crypto enthusiasts: yield farming. A term unheard of previously, crypto enthusiasts could talk only about yield farming for days on end — and for good reason, considering that yield farmers were turning more than 100% in returns at the peak of the DeFi season, sometimes in a matter of 24 hours.
Yield farming is the process of staking one’s own crypto on a decentralized lending protocol and providing liquidity to a pool of users, all to earn lucrative rewards. In a decentralized setting, borrowing and lending functions and rates are determined by the protocol these assets are locked on.
Popularized by the launch of Compound’s namesake governance token COMP, multiple DeFi platforms were quick to follow suit, with some projects delivering up to 300% to 500% in annualized yield.
Earning up to five times your initial investment in a short period of time? Some may think it’s too good to be true, but perhaps not where DeFi and yield farming are concerned.
However, with high rewards come higher risks. Yield farming strategies can often be so complex that new market entrants hopping on the bandwagon hoping to make a quick buck may have their funds wiped out in a moment of carelessness. On top of that, vulnerabilities in these smart contract protocols present a threat to farmers, whose funds sit on a possibly unsecured network.
Back to Basics
Does higher yield always come with higher risks? As with all investment and trading strategies, there is no true shortcut to unbelievable massive returns. Aside from ensuring that one performs due diligence before participating in any sort of money-making markets, perhaps testing your skills in a controlled, but similarly rewarding, environment is key.
Begin with smaller trades and place your funds in well-known digital assets. You can then move on to trying your hand at paper and real trading competitions, where you can generate returns on higher yield digital assets in a safe manner.
The journey to higher yields is within grasp, bit Bybit.