Cryptocurrency space moves fast. One of the latest trends that’s intrigued and excited institutional investors is Bitcoin yield. Institutional players are very much leading the charge and putting more capital behind Bitcoin. They’re searching for ways to provide passive streams of income from their investments. The boom in demand for Bitcoin yield products is changing the digital asset environment. It offers potential boons but significant pitfalls for accredited investors and the general public alike.

The Driving Forces Behind Institutional Demand

Institutional investors are notoriously jittery and highly disinclined to take a risk that doesn’t have a high upside potential. Just buying and holding Bitcoin—which, again, is likely to be profitable in the long term through capital gains—doesn’t provide recurring cash flow. This is where Bitcoin yield products enter the equation. These services let you earn yield or reward points on your Bitcoin assets. They turn a dormitory-like parking asset into an active cash cow.

Several factors are driving this demand. The first is the macro trend of institutional adoption of Bitcoin at large, itself. As companies and funds increasingly add Bitcoin to their balance sheets, they instinctively look for ways to maximize their investment. The introduction of Bitcoin-related products such as ETFs have already helped legitimize the asset class. This will provide more large, institutional investors with easy access to Bitcoin. As investors come to terms with the current low-interest-rate environment in traditional finance, they are taking a closer look at alternative sources of yield, and Bitcoin yield products clearly emerge as the best option.

Strategies Institutions Are Using

As a general rule, institutions utilize one of three strategies to earn yield on bitcoin—all with different levels of risk. The first and most popular of these is lending, where Bitcoin is lent to borrowers with an interest rate paid on the loan. Platforms like BlockFi have made their fortunes in the past using this model. A second strategy is basis trading, or profiting off of the spread in Bitcoin prices across different exchanges/markets. Coinbase Asset Management (CBAM) uses third-party custody integrations for executing trades. They use basis trading, a strategy they believe will dramatically reduce counter-party risk and produce yield.

Staking, which validators use to generate yield on platforms including Ethereum, is one of the most popular yield-generating mechanisms in crypto. It doesn’t work when applied specifically to Bitcoin. Others, like Binance or Kraken, let you stake a wider mix of cryptocurrencies. Better yet, they issue liquid tokens which you can take and use in other DeFi (Decentralized Finance) protocols—boosting Bitcoin yield strategies indirectly. Decentralized Validator Vaults (DVVs) allow users to stake ETH and receive ETH-based rewards directly. Additionally, they can earn bonus tokens to multiply their rewards!

Risks Involved in Bitcoin Yield Products

Although the idea of generating yield on Bitcoin sounds exciting, it’s important to be aware and familiar with these inherent risks. At an annualized volatility of 81%, Bitcoin is just more volatile by its very nature than more established assets. Given this volatility, the value of many yield-generating strategies can ebb and flow wildly. Additionally, the cryptocurrency market is not as regulated or protected as traditional financial markets. As a result, investors are left vulnerable to significant unexplained losses due to hacks, scams, and regulatory shifts.

Security risks are a major concern. Continuing education Bitcoin investors assume responsibility for securing and managing their cryptocurrency. When compared to more traditional assets that are stored by intermediaries, this responsibility creates an extremely precarious scenario. Notorious Mt. Gox bitcoin exchange hack occurs in 2014. It led to a breathtaking loss of $460 million in crypto, emphasizing the huge risks at play. Lastly, Bitcoin’s non-standardized value means there’s no way to reliably gauge the actual value of investments.

Platforms and Methods for Generating Bitcoin Yield

Several platforms and methods are available for generating Bitcoin yield, each with its own characteristics:

  • Coinbase Asset Management (CBAM): Offers a fund for institutions to receive a yield on their Bitcoin holdings, targeting a 4-8% annualized net BTC yield. They use basis trading strategies and third-party custody to mitigate risk.
  • Lending Platforms: Platforms like BlockFi have historically generated yield through lending, but this method can be riskier due to counterparty risk and potential defaults.
  • Decentralized Finance (DeFi): While not directly involving Bitcoin staking, DeFi protocols offer opportunities to earn yield on other cryptocurrencies, which can indirectly support Bitcoin yield strategies.

The Future Impact on the Bitcoin Ecosystem

As the popularity of Bitcoin yield products increases, their effect on Bitcoin’s economic incentives and ecosystem will be profound. As more institutions engage in these strategies, it will contribute to greater liquidity and price stability for Bitcoin. Furthermore, the demand for Bitcoin yield could drive innovation in financial products and services built on top of the Bitcoin blockchain.

Yet, just as opportunities abound, we must take heed of significant potential downsides. The search for yield might encourage greater risk-taking and leverage in the Bitcoin market, which would further amplify price volatility. Regulatory scrutiny of Bitcoin yield products is sure to increase, which could further affect their availability and attractiveness.

Actionable Advice for Investors

For institutional investors, it will be important to understand the risk-reward profile of various Bitcoin yield strategies and make selective investments accordingly. As a feature, CBAM’s use of basis trading and third-party custody will appeal to anyone looking for a more conservative strategy. As with any financial intermediary, careful due diligence on platforms and counterparties is key.

For the average retail investor, the environment is a little less straightforward. Other platforms, like BlockFi and Celsius, extended these types of Bitcoin yield products to retail customers. It’s important to know the risks and only invest what you can afford to lose. Coinbase Asset Management, a division of cryptocurrency exchange giant Coinbase, is creating a new Bitcoin fund to let institutions earn yield on their BTC holdings. So far, there has been nothing said about a similar product coming for the retail investor crowd. BlockFi’s fund made yield by lending, not by engaging in a safer basis trade. It’s unknown if this product is truly available to retail investors.

Another important principle is to avoid concentration by holding just one type of cryptocurrency. Or for adventurers, look beyond Ethereum to other stakable cryptos and to DeFi protocols. Do your homework.

Strategy's BTC Yield Target

The strategy currently uses BTC Yield as its main internal KPI. This is a metric providing insight as to how quickly bitcoin holdings are increasing compared to diluted shares outstanding. The raise was largely due to the strong performance of BTC Yield, which the company boosted from 15% full-year target to 25%. For the quarter, Strategy realized a notable 11.0% BTC Yield. As of April 28, the year-to-date BTC Yield hit an even more incredible 13.7%.

Navigating the Bitcoin Yield Landscape

The Bitcoin yield landscape is changing fast, and knowing what’s out there and how it works can help you protect yourself from making a bad investment. Inject some beauty into your work BlockchainShock.com, our favorite source for incredible market sentiment analysis, advanced technical breakdowns and expert coverage of staking rewards. By keeping on top of these important developments, investors will be in a better position to navigate the risks and opportunities that Bitcoin yield products present.