Hoping that cryptocurrency – be it bitcoin, ethereum or any other – appreciates in value is the main way to make money in the world of digital coin investing.
But some claim that it is also possible to earn money off cryptocurrency, or make returns in other ways from holding it.
How would a cryptocurrency investor do that, is it too risky and how much faith do you need to put in unregulated and previously unheard of entities offering the opportunity? We take a look.
Is your crypto asset just sitting in a wallet and doing nothing? It could be earning interest or returns elsewhere, but as with anything crypto this is high risk
With the crypto boom back on in recent months, gains have been rapid and prices volatile once again.
Since autumn, bitcoin has broken the $20,000 (£14,589), $30,000 (£21,884), $40,000 (£29,179), $50,000 (£36,474) and $60,000 (£43,769) marks.
In January, JP Morgan claimed bitcoin could rally as high as $100,000 by the end of this year but as any long-term crypto-watcher knows, the price could just as equally sink.
Nonetheless, cryptocurrency is a long-term game for its keenest investors and that means many have coins just sitting in wallets with the intention that they remain there for perhaps years.
But can you reap a return from it in the way you can interest on cash, or dividends from shares, or is it just an asset like gold that acts as a store of value and gains only come from a rising price?
Alex Wearn, CEO of decentralised exchange Idex, says: ‘There are a lot of ways to earn interest in cryptocurrency including “bitcoin rewards” credit cards, crypto lending services, and DeFi (decentralised finance) yield farming.
‘Some of these require little to no crypto knowledge (bitcoin credit card rewards), while others require deep technical knowledge (yield farming).
‘In general, the more knowledge required or the riskier the investment asset, the higher the potential yield.’
1. Interest accounts
A number of centralised and decentralised finance (DeFi) platforms are offering some form of interest if you store digital currencies (like bitcoin) and stablecoins (like dai) with them.
A stablecoin is also a digital currency but, unlike cryptocurrencies like bitcoin, its price is pinned to an asset or currency. That currency is usually the US dollar.
DeFi platforms give people the ability to lend or borrow from others, trade cryptocurrencies, earn interest in accounts that mimic traditional savings and more. They’re not controlled by a bank or regulated.
What is the difference between a centralised and decentralised finance platform?
When a financial platform is described as ‘decentralised’ it means there’s no ownership or control over it.
Clem Chambers, CEO of private investor website ADVFN and Online Blockchain, explains: ‘The internet in the old days was ‘decentralised’ there was no office to raid or shut down there’s nobody controlling it. It’s all running autonomously.
‘If something is decentralised it gets out of politics. It can’t be bribed or bullied. It’s just there. But if something is managed by people or has a central point then it’s centralised.’
Daniel Polotsky, CEO of bitcoin ATM provider CoinFlip, adds: ‘In the case of crypto-savings accounts – your accounts are being hosted by a third-party, like BlockFi, which is a centralized-service despite supporting decentralized cryptocurrencies.’
As with a traditional interest-bearing account from a bank, you can withdraw your crypto assets when you want – albeit potentially with restrictions – along with any interest that you have gained.
On earning crypto returns, Daniel Polotsky, CEO of bitcoin ATM provider CoinFlip, said: ‘The most common [way], for the majority of consumers, is through centralised services such as BlockFi and Celcius, which have “interest accounts” that offer up to almost nine per cent interest on stablecoins and about five per cent to six per cent on major cryptocurrencies.’
He adds: ‘This is as easy as creating an account with these companies and depositing bitcoin or transferring money with a bank account.’
The problem with traditional savings accounts is that they offer interest rates that are heavily correlated with monetary policy – and with interest rates being slashed to stimulate economies, savers have paid the price.
DeFi accounts can offer greater returns because they do not inhabit a world of currencies affected by central bank interest rates.
But in this unregulated world, there’s no consumer protection to fall back on if you invest your digital coins in them and they go bust or you lose your cryptocurrency.
Whereas with a traditional savings account in the UK you benefit from the Financial Services Compensation Scheme deposit protection up to £85,000 with each individually licensed bank or building society.
To compensate for the lack of protection some DeFi accounts have aligned their offerings to existing regulations issued by banks and governments to appeal to users. Some go so far as to offer private insurance that investors can buy. But not all offer this.
2. Cashback on a crypto credit card
Daniel Polotsky, CEO of bitcoin ATM provider CoinFlip, says the most common ways people can get interest on bitcoin is through centralised services that have ‘interest accounts’
While the cryptocurrency industry is doing much to distance itself from the traditional banking model, it seems it can’t help but mirror it in some ways.
This is why it’s hardly surprising that some in the sector are starting to offer crypto credit cards.
At the time of writing, there appear to be no such providers offering a crypto credit card in the United Kingdom.
However, there are new providers set to launch in the US this year: the BlockFi Bitcoin Rewards Credit Card and the Gemini Credit Card.
And where any other fintech industry leads, the UK often swiftly follows.
BlockFi says on its website: ‘For every transaction that you make on the card, 1.5 per cent cash back will accrue and then automatically be converted to bitcoin and placed into your BlockFi account on a regular monthly cycle.’
Gemini, meanwhile, promises to give up to three per cent back in bitcoin or other crypto.
David Moss, CEO of Strongblock, says: ‘Most of these cards are just a different take on the “percentage back” promotions of traditional cards, except you get the percentage back in bitcoin. With bitcoin volatility and transaction fees, there is some risk.’
The risk here, of course, would be that you’d need to spend on the card to get the rewards. If you default, you could lose out as with a regular credit card.
3. Decentralised lending and renting
Decentralised lending is the ability to lend money (digital or otherwise) without the need for an official institution, such as a bank or credit provider, getting involved in the process.
It could all be automated through a smart contract. There are various smart contracts on offer online. They are managed through a computer program or transaction protocol, which automatically executes the transaction on behalf of the parties that agree to the deal.
It’s also possible to lend and rent out cryptocurrency through various online centralised platforms, including a London-based one, Nebeus.`
Michael Stroev, chief operating officer and head of product at Nebeus, says: ‘We give our crypto to low-risk and highly secure institutional partners to obtain liquidity. We use another part for re-investment in various portfolios. We need to be profitable on the six per cent that we payout.’
Besides not always knowing what exactly happens to the crypto when you rent it out there’s other conditions to consider, such as the lock-up period. In Nebeus’ case, there are two programmes on offer.
The Juniper programme offers 3.5 per cent return per annum with a minimum lock up period of one month, while its Sequoia programme makes customers lock their money in for three months.
Stroev says: ‘This is based on the fixed value of the crypto on the day the person deposited the crypto. So if you deposited your bitcoin now the rate would be fixed at €48,309.57 (£41,660.67) ($57,091.70). We pay out the percentage in euros and not out in bitcoin. We’re trying to merge bitcoin and cash.’
4. Yield farming
Yield farming, also known as liquidity mining, effectively involves an investor moving their cryptocurrencies to different ‘pools’ on various DeFi platforms, such as Aave or Compound.
David Moss, CEO of Strongblock, says that most crypto credit cards are just a different take on the “percentage back” promotions of traditional cards
In return for pooling your cryptocurrency you can earn tokens, interest, or rewards.
It can get very complex.
Platform Strongblock says: ‘The advantages of yield farming is that it offers higher returns. The disadvantage is that it’s harder to use and less predictable.’
Again you’re not protected by regulators if you use these types of platforms. But your money could be protected by smart contracts.
As smart contracts are automated, they will pay out as per the contract’s terms and conditions. There’s no person or company involved that…