When crypto assets sit in your account, you can only make money through appreciation. Unfortunately, this risky proposition can lead to price depreciation that gets you wiped out and puts you back at square one. Bitcoin has outperformed the market over the past decade, but some prefer assets that produce cash flow. Crypto yield farming tackles this issue and gives you a way to earn with crypto. We’ll share how yield farming works and how to get paid for holding onto crypto.
Invest in over 30 cryptocurrencies from your checking account with no trading fees with the Current mobile app crypto feature.
Titan is an investment platform with a team of experts actively managing your portfolio based on your chosen strategy, including cryptocurrencies.
Alto IRA allows you to invest in stocks, bonds, mutual funds, ETFs, real estate, cryptocurrencies, and even gold for your retirement.
What is Yield Farming in Crypto
Some companies want to borrow your crypto. They can use your crypto to achieve higher returns and finance projects. If you let these companies borrow your crypto tokens, you will receive interest. This method works similarly to a traditional savings account. Financial institutions can use the money in your savings account, and they will pay you interest for sticking with them. However, financial institutions offer less than 1% APY, while you can get over 10% APY from a Bitcoin interest account.
Yield farming works perfectly for long-term crypto investors who believe in the asset’s long-term outlook. You get paid for holding onto crypto you would have held onto anyway. Investors can reinvest the crypto yield into additional coins to increase future payouts.
How Does Crypto Yield Farming Work?
Crypto yield farming relies on automated market maker technology. This foundation forms the backbone of most decentralized exchanges. It establishes who pays the interest and who receives the payment. The entity providing the crypto gets the payment, while the borrower pays for the privilege of borrowing your crypto assets. Crypto yield farms have different rules and returns. You should review the following details before investing in a crypto yield farm.
- APY: Bitcoin APY outpaces traditional savings accounts by a long shot. However, some companies provide you with higher crypto APYs than others.
- Yield Farming Pairs: Some yield farms include a pool of cryptocurrencies instead of a single crypto. A crypto farm may invest funds into a BTC/ETH pool that gives you exposure to both coins. Investors should consider each crypto asset’s volume. High volume makes it easier to exit the position. Since Bitcoin and Ethereum have high trading volumes, you won’t have to worry about liquidity problems with these cryptos. Cryptocurrencies with smaller market caps and less attention may give you liquidity problems.
- Reward Coins: When you earn interest on crypto, the payment can come in many forms. You will get paid in crypto. Some companies pay based on your investment. If you collect interest on Bitcoin, you can expect Bitcoin as the interest payment. The same rule often applies to Ethereum and other cryptos. Other companies create a specific coin for doling out as interest payments.
- Lock-Up Period: Some crypto exchanges establish lock-up periods for a crypto interest account. You can select which lock-up period to use for your tokens. Crypto investors can choose longer lock-up periods if they don’t intend on selling their crypto. Higher lock-up periods come with higher interest rates, helping you earn more with your crypto.
- Distribution Frequency: Each crypto farm has different distribution frequencies. Some platforms provide daily interest payments that accelerate compounding, while most do weekly distributions that minimize compounding.
Is Yield Farming Profitable?
Crypto-yield farming can be profitable. You can earn a high-interest rate and make additional gains through crypto appreciation. Yield farming provides a valuable hedge in case your crypto tokens underperform. A 16% APY gives you coverage in case your holdings fall by 16%. Investors should consider the yield and asset appreciation when determining profits. Yield farming offers a built-in dollar-cost averaging strategy since the account provides daily interest payments. You’ll grow your position during the highs and lows.
Invest in over 30 cryptocurrencies from your checking account with no trading fees with the Current mobile app crypto feature.
Titan is an investment platform with a team of experts actively managing your portfolio based on your chosen strategy, including cryptocurrencies.
Alto IRA allows you to invest in stocks, bonds, mutual funds, ETFs, real estate, cryptocurrencies, and even gold for your retirement.
What Are the Types of Yield Farming?
Crypto investors can use several yield farming models to generate interest from their crypto. We’ve outlined some of the choices below.
Liquidity Provider
Letting companies borrow your crypto helps facilitate smooth trading. Liquidity providers will give you a percentage of trading fees on their platforms based on how much crypto you let them borrow.
Lending
You can lend your crypto to a platform in exchange for interest payments. Some companies provide daily interest payments while others pay weekly.
Borrowing
The platforms aren’t the only ones borrowing crypto. You can open up a crypto credit line to put more money to work expanding your portfolio. You can use the crypto line of credit proceeds for any purchase, not just portfolio growth.
Staking
Some blockchain systems use a proof-of-stake system to award blocks of crypto. Staking more crypto increases the likelihood of receiving a reward. This reward is a crypto block, and it’s an environmentally safer proof model than the proof-of-work model. Staking makes it easy to earn passive income with crypto.
Earning
On some platforms, you can simply hold crypto in your wallet and start earning through the company’s high-yielding crypto savings accounts.
Benefits Of Yield Farming in Crypto
- Open To Everyone: Anyone can start earning interest on their crypto. You don’t have to be an accredited investor or hold an entire Bitcoin. You can start earning interest on fractional Bitcoin holdings.
- Low Risk, High Reward: Crypto yield farming is a low-risk income stream for long-term crypto holders. You get to make money with assets you already feel good about holding. This low risk also comes with a high reward.
- Convenient And Straightforward: You don’t have to jump through many hoops to start earning interest.
- Earn Interest Just by Holding Your Crypto: You don’t have to trade crypto or spend time looking at charts. You essentially turn your crypto holdings into cash flow-producing assets like dividend stocks and rental properties.
- Higher Profits Than Traditional Platforms: Financial institutions don’t offer APYs remotely close to what crypto platforms offer. Crypto yielding rewards investors with some of the highest interest rates available.
Drawbacks Of Yield Farming in Crypto
- Volatility: Crypto is a volatile asset with dramatic price swings. Long-term investors are more patient, but crypto’s price volatility can lead to emotional investing.
- Rug Pulls: Some crypto yield farms are scams. Malicious actors will run off with your money and never pay you back. Crypto yield farms can produce higher returns but only work with reputable brands.
- Impermanent Loss: Crypto yield farms rely on liquidity pool allocations. These allocations impact the value of crypto within the pool. We’ll use a crypto yield farm with Ethereum and Bitcoin to demonstrate this concept. If Ethereum’s price drops and Bitcoin rises, future investors will put Ethereum into the pool at lower prices. This scenario will decrease the cost basis of the combined Ethereum available in the pool, leading to a loss. You only incur this loss if you withdraw at a loss. Ethereum can recover by the time you want to take out your funds.
- Regulations: Crypto has received heavy regulatory scrutiny since its early days. Regulators may try to change rules about crypto and identify more coins as securities, enabling regulation. Although DeFi platforms protect crypto from a central authority, you should still monitor regulatory activity.
- Hacks: Only work with secure crypto yield farmers that protect users. Hackers will try to get into yield farms and steal the crypto. Make sure you feel confident about a crypto yield farm’s ability to keep your crypto safe before investing in it.
Yield Farming in Crypto: The Bottom Line
Yield farming lets you turn your idle crypto into consistent cash flow. Long-term investors can use the interest payments to cover living expenses and avoid touching their crypto funds. You can also reinvest the interest to increase your daily payouts. The interest rate helps you amplify your gains or cushion your losses depending on price movement. Yield farming presents investors with an excellent choice for generating cash flow with their assets.
