Crypto Yield Farming. In this brief overview, I would like to discuss some things that colleagues, friends, and myself have been contemplating when it comes to sound financial decisions regarding personal money, investments, savings, and interest. There are many forms of investments, including the legacy systems of traditional finance and FinTech, but here we will focus exclusively on the field of cryptocurrencies. Although, I want to stress that it currently seems like it’s not the worst idea to diversify not only within one certain space but also in various fields including traditional and new assets alike, think real-estate, precious metals, stocks, ETFs, art, Forex, cryptocurrency, etc.
For many people, especially when we’re younger or just starting to get our finances in order, the number one goal is to make money. So many people don’t even think too much about what happens after they’ve actually made some money, more than what they need on a daily basis including things like emergency funds, etc.
Nothing sounds sweeter than “letting your money work for you”.
And while it isn’t quite as easy as it seems – we still wanted to give you an overview of some of the available options:
So you’ve finally got some money – Great! Now what?
Leaving your money in the bank doesn’t seem like a viable option these days. Coming from the promised land of crypto and DeFi, whenever I look at the ridiculously low interest rates that banks are willing to pay these days, I have to try and keep myself from bursting into laughter. Let alone when we start thinking about negative (!) interest rates that have been established in some countries. In some places, you have to actually pay the bank now, for having money in it, at their disposal. This only makes sense in a twisted and clearly irrational world but nonetheless, the one we currently live, work, earn, spend and save in. It’s as if the banks graciously award us with the divine right of bank accounts that we need to keep filling up for them, at a hefty price of course. So not only do you get fined for being in the red, but you are now also punished for having money come in and saved up. And while, as mentioned above, I do not deem it wise to keep all your eggs in one basket – that means I would also never put all of my money into crypto. But neither in the bank, since that’s where it’s constantly getting less and less as well.
So what options to make even more money from your money (and not have it become less and less or devoured by inflation!) are there in the world of crypto?
Once again, making smart and sound plans is not the hardest part – It’s sticking to them.
- Trading – Quick but risky way to make more money.
If you’re smart, have a profound understanding of coin/token fundamentals, as well as how the markets work and are very able to stick to a strategy and always keep your emotions in check (!), then you can buy more crypto with your fiat (or crypto), make profits and keep playing that game until you’ve reached your personal strategic goal (At which point you will probably be back to square one of what to do with the money you’ve made on top).
- Crypto Gains – Taking Profits.
HODLING is not the worst idea, especially if you suck at trading. Dollar cost-averaging and holding your cryptos has worked well for many. But even hardcore HODLERs probably don’t plan on holding for a hundred years. Sooner or later you might actually want to take – at least some – profits. And then you can either channel them into fiat, and (maybe) other traditional assets (stocks, real estate, buying precious metals, etc.), depending on your personal and financial plans, strategies, and goals. The “million-dollar-question” – maybe even literally – is when exactly to take profits and how much. Again, you need to decide for yourself. In personal finance, there unfortunately isn’t a one size fits all type of approach that makes sense for everyone.
But sometimes it might be good to, again, not go all out (just like you shouldn’t go all-in) but take maybe a third or half out and see. For this, it helps if you set some goals for yourself beforehand. So let’s say a certain price at which you will sell (1/2, 1/5) of your cryptocurrency holdings, or when you’ve reached a certain portfolio value (that you then maybe use to buy and own an apartment or another asset). It’s always good to make a plan and stick to it in advance so you don’t get overwhelmed or make rash decisions when market feelings run high (or low).
- Staking – Solid and long-term solution for established cryptocurrencies.
Besides the fact that staking also increasingly becoming a new model of crypto governance and securing chains (Proof of Stake instead of Proof of Work) it is also a way to invest your crypto and gain some more of it in the process. When staking your crypto from a wallet/exchange, you lock it up in staking pools to provide stability to the network. For that, you get rewarded by getting a certain, usually quite stable percentage back. The concrete amount you can make depends on the asset: more established cryptos like ETH for example usually will yield single digit gains (at greater security and stability), while the more low cap and experimental currencies sometimes offer double, or even triple digit interest percentages.
By using staking pools, stakers join their efforts to increase rewards. There are many different options for staking crypto – However, be very aware of the details of your staking platform! For example, currently, ETH cannot be unstaked once you’ve staked it. Staking can be done directly or via the big exchanges (e.g. Binance, Coinbase, Kraken and others). Interesting to note its that some exchanges also let you “stake” fiat, i.e. you can get interest on the fiat you store there too!
Another thing to know about: “compound interest” – many exchanges and other providers not only offer interest on the original amount that you put in, but you also get interest for the total amount you stake there, i.e. your initial deposit plus the rewards you have earned from it. In other words, you will get rewarded for your deposits and your rewards compounded together, so the longer you leave your asset staked for, the more rewards you will accumulate. Another great feature is that while rewards are always spoken of and calculated from a yearly point of view (APY – annual percentage yield), your rewards will be paid out more frequently, depending on the provider (daily, bi-weekly, etc.), and can usually also be withdrawn faster and more easily.
- Crypto Yield Farming – Very high risk – very high reward.
Crypto Yield farming is the latest hype in crypto and DeFi. When you’re yield farming cryptocurrencies, it effectively means that you’re locking your tokens up to provide liquidity for the markets (DEXs – decentralized exchanges) via liquidity pools, that are operating on smart contracts. Some of the most popular examples are: Aave, Uniswap, SushiSwap, PancakeSwap, ApeSwap, and many more.
For this type of providing some of your crypto to a lending protocol, you get rewarded with additional crypto (governance tokens, trading fees). Some of the providers for farming (farming pools) promise great rewards in the 3 digit percentage range of interest (APY). However, please be very careful with the promise of such high rewards, because usually they only apply for cryptocurrencies that aren’t very established, usually very new and often low cap and low volume. And, as per usual, on top of that, there’s always the risk of network attacks and smart contract errors.
Whenever you’re locking assets up or depositing them, you are confronted with what is called impermanent loss. That means that, while locked/deposited, your crypto might lose a significant amount in value, when the market (either the market in general as is the case in bear markets or crashes, or just your selected coin/token). The loss is impermanent in the sense that, if the value of the crypto asset goes up again thereafter to the same level it was before (or higher) then you’ve not actually lost anything, only potentially (and of course, the value could go up to higher than previous levels too). One way to mitigate the risk of impermanent loss is to focus on established stablecoins, as they are per definition much less volatile.
Naturally, the potential for loss with crypto yield farming is as high as the potential for gains so be extremely careful with this type of investment and, as always, never invest more than you would be willing to completely lose without batting too much of an eye. This is more of an experimental field, where the potential gains are incredibly high, but so are impermanent and permanent losses. Lastly, as with staking, a great feature is that while rewards are always spoken of and calculated from a yearly point of view (APY – annual percentage yield), your rewards will be paid out more frequently, depending on the provider (daily, bi-weekly, etc.). - DeFi Asset Management, DeFi Lending etc.
Some companies now offer automated DeFi asset management, decentralized asset management funds, or DeFi lending platforms. However, this also seems like a risky method until these companies are more established and well audited, especially since with many such providers you need to lock your assets up for a significant period of time without being able to withdraw them quickly if, for example, prices crash, you need the funds for an emergency, etc. To trust a third party with your assets always involves a risk (as does being your own bank if you do not know how to handle wallets, keys, and the like), no matter which kind of third party, but the risk can be significantly reduced if you only use third parties that you trust, that are audited, well established (have been in the business for a longer time) and have substantial insurance for the assets they hold in custody.
As with most things, it’s all about minimizing potential risks as much as possible and feasible while trying to also make gains and prevent losses.
Let me end with a big DISCLAIMER (since this is what we always have to do since some individuals seem to have won their elementary school diploma in the lottery):
This is not, in any way, financial advice. It cannot be, because financial decisions are always highly personal and they are dependent on your own circumstances, life plans, and individual expectations. Furthermore, it is in your own interest to make all decisions concerning your finances yourself or with the help of licensed professionals since it is: your money and you will be the one in pain, suffering the consequences if you lose it.
So, always do your own, thorough research! (DYOR)