Generating Yield on Crypto - Crypto #6

Generating Yield on Crypto - Crypto #6

Publish Date
Sep 22, 2021
Last Edit
Mar 23, 2022 12:51 AM
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This is the fifth entry in our Crypto Starters series. Be sure to check out the rest!
If I were a good marketer, I would have covered this earlier in the series. But I like establishing a base and a frame before actually decorating a house. Call me old fashioned!
Anyway, one of the best parts about cryptocurrencies is the ability to generate yield on those assets. What is yield? If you don't know what yield is, you may want to brush up on your basic economics first! But we'll refer to yield in terms of APY or Annual Percentage Yield, which reflects your gains in an asset if you hold it for one year.
Case in point: let's say you hold $10k of USD in a savings account. A good savings account right now... generates 0.25% APY. That means that at the end of one year, you'll see your $10,000 savings grow to a big, whopping... $10,025.
As we say in the business... those are rookie numbers. If you meet someone who is happy with their 0.25% yield, kindly slap them for me and hand them my business card.

Crypto Yields

Crypto can provide much higher yields than fiat finance. Some of this is through a clearly understandable mechanisms, some cases in crypto though are clearly unsustainable. Let's cover a few cases:
  • On the understandable front: banks charge out loans to customers and businesses at much higher rates than they provide back via savings. Credit card debt charges at ~15-20%, and business loans charge at anywhere from 4-10+% depending on the risk of the company. But remember, they are loaning out the money that you deposit and only earn 0.25% on (at best!). Cryptocurrencies disintermediate (read: remove) the bank, thus bringing these two rates closer together. These lending returns are transparent and sustainable.
  • Next, we have staking. Many new cryptocurrencies are what is called "Proof of Stake" which can get complicated but basically means that you are able to stake your tokens and generate a return (it is more complicated behind the scenes, but understandable). This basically captures transaction or block rewards and provides a steady return similar to basic lending protocols.
  • Next, cryptocurrencies can be provided to liquidity pools to Decentralized Exchanges (or Dexes) that we covered last time. In doing this, they capture a small fee (typically 0.3-0.5%) of the transaction cost which is then spread among the pool. These can yield quite high returns (10% to 50% or more), but the yield is variable and does come with some additional risks. As crypto stabilizes too, you would expect this return to decline as more people can access liquidity pools and the inflows slow. So this return is transparent but likely not sustainable.
  • Lastly, you have the dark recesses of the Binance Smart Chain, that offer APYs of at least 100% and up to 300% or more. If this sets off alarm bells, then good. It should. No service should be able to reliably generate 100% APY. I mean, if something did exist, then we could all retire once we hit $200k in savings because that $200k would generate $200k to live on each year! Sounds great, but it definitely won't last. How this can be done is a bit unclear (another warning sign). Certainly much of it is fueled by growth, but it is worth being wary of.
Alright, so that was a lot. But what it boils down to is this: you can get substantially better yield in crypto than you can in traditional finance. Of course, most of these rewards are paid in kind so if you loan Bitcoin then you get rewards in Bitcoin. This does mean that you stay fully exposed to the underlying asset, which can be good or bad depending on your perspective. But this is true of the US Dollar as well - by holding it or putting it into savings accounts, you are exposed to the moves of the USD relative to other currencies or assets.

Some Examples

That all said, let's get practical. I have holdings that fall into all four of the buckets noted above. Let me provide an example of each to help provide some clarity:
  • I have a chunk of Bitcoin generating 6.2% APY with Celsius, which makes money by providing low cost loans in USD backed by their cryptocurrency holdings.
  • I have Polkadot (DOT) tokens staked on Kraken earning 12% APY, as well as some Tezos (XTZ) that "bake" instead of "stake" at ~5.5% APY, and some Cardano (ADA) staking at around 5% on various platforms.
  • I have added a few different tokens (ETH, AAVE, UNI and a few others) to liquidity pools on Uniswap. These have been running for about 2 months and are averaging about 30% APY by capturing a bit of each transaction that people do on Uniswap.
  • Lastly, I have several holdings (CAKE, BIFI, LIT, BUNNY) that I've added to liquidity pools on PancakeSwap that generate between 40% and 160% APY currently by pairing them with BNB (the Binance token) to provide liquidity at even higher returns.
What that brings me to overall is a crypto portfolio that returns ~9% APY on its base. Of course, this maintains full exposure to the cryptocurrency assets, so I still gain relative to US Dollars when they go up (or lose when they go down). So what does that 9% mean? Let's examine a few cases:
  • Crypto market (and my portfolio) drop 20%. Ugh. But as my APY is 9% my loss relative to the dollar is only 12%.
  • Crypto market goes down 2%. Not great, but with the 9% yield I'm up 7% vs. the dollar.
  • Crypto market goes up 20%. Awesome! With my 9% yield I end up being up 31% (as the 9% compounds on the growth as well).
  • Let's say crypto "goes zoom" and ends the year up 100%. The asset growth is most of the jump, but that 9% becomes 18% when you look at it relative to the static USD and I end the year up 118%.
Bottom line: that 9% gives me a heck of a boost. It dampens losses and boosts gains, of course. But importantly it is also emblematic of what a true "store of wealth" should be. While some political persuasions may not like the fact that wealth tends to beget more wealth, this is the natural and core to what a currency must do (along with providing a medium of exchange).

A Friendly Reminder: Inflation is the Government Stealing Your Wealth

I don't necessarily think we are heading for a Weimar Mark situation, which is well summarized by this image below.
notion image
But just as foolish as a blind comparison to Weimar is the blind assertion that such an event can't happen today. One Venezuelan Soberano was worth ~$0.10 cents back in 2012. Now it is worth between $0.000000001 and $0.0000000001.
A recurring theme: change happens slowly, and then quickly. The Venezuelan Soberano was stable... until it lost 99% of its value in 4 years... and then it lost another 99% in 14 months... then again in 10... and again...
A recurring theme: change happens slowly, and then quickly. The Venezuelan Soberano was stable... until it lost 99% of its value in 4 years... and then it lost another 99% in 14 months... then again in 10... and again...
Naturally, it is illegal to publish the real "parallel exchange rate" that people are willing to exchange Soberanos to US Dollars for in Venezuela. But the point should be lost on no one: modern cultures can, and will, destroy their currency through bad management.
The U.S. has had some advantages on this front as the leading super power and the "global currency." But these advantages don't last forever, and it is becoming more and more clear by the day that our leaders have squandered the gift we had and that no one is driving the ship.
Anyway, we've moved a bit beyond yield. But the point is this: a good store of value protects the wealth that you have first, and then ideally grows that wealth in a meaningful way. Crypto serves this purpose, dollars do not. While not as intense as Venezuela, the Federal Reserve's money printer going "brrrrrr" has punished a generation of savers and fiscal responsibility to create an unsustainable rat race to keep pace with the growing amount of dollars needed to live comfortably.
My advice is unequivocal: opt out.