Bitcoin investors are witnessing a meteoric rise of the digital asset and have accumulated more than 170% year-to-date returns. Most recently, Bitcoin’s avid critic economist Nouriel Roubini recently softened his stance in an interview stating that Bitcoin may be “partial store of value.” Ranks of several prominent names in finance and business have endorsed Bitcoin – from BVI hedge fund manager Paul Tudor Jones, to venture capitalist Chamath Palihapitiya, and billionaire investor Stanley Druckenmiller.
This week, Larry Fink, CEO of BlackRock
Institutional attention to Bitcoin continues to be strengthened by three main drivers:
- Historically Low Interest Rates – Federal Reserve Chairman Jerome Powell confirmed that we can expect near-zero interest rates for the foreseeable future, negatively affecting investors’ fixed-income portfolios in bonds and treasuries, and creating room for allocation into alternative investments.
- Inflation – With the Federal Reserve targeting an average inflation rate of 2%, investors sitting on cash or low-yielding instruments are growing increasingly concerned about monetary devaluation.
- Geopolitical Instability – As political tensions rise between U.S. and China, and the Dollar’s reserve currency status is increasingly questioned, holding a primarily USD-denominated portfolio poses an inherent risk to the long-term investor.
Recognizing these risk factors, public companies such as MicroStrategy
As this bullish Bitcoin trend continues, another line of business has emerged – interest-bearing products for cryptocurrencies.
Products like BlockFi, Nexo and Celsius provide interest-bearing accounts earning 6% to 12% APY on their Bitcoin holdings. For investors anticipating that Bitcoin will continue to rise in price, interest-bearing accounts are a great solution to maintain cash flow without selling any of the appreciating digital asset.
Centralized platforms such as these, however, carry inherent risks requiring the user to trust a new age of ‘crypto-banks’, their teams, custody and processes.
A new wave of alternatives is coming from the decentralized finance (DeFi) industry, however. Decentralized applications utilize smart contracts for interest-bearing payments to significantly increase transparency. From borrowing and lending protocols, to insurance, to asset management, audit-able smart contracts allow investors to view and track their funds on-chain while harvesting superior returns.
One example of this type of protocol, is Kava’s Hard Protocol, which allows depositors to ‘harvest yield’ from Bitcoin and other non-ethereum assets. Users ‘stake’ their crypto in a pool of assets, which the smart contract can then safely lend out to a pool of borrowers who collateralized their loans. This creates a decentralized and automated borrowing and lending platform, without any middle-men, custodians, or their fees. Similar to popular DeFi platforms MakerDao and Compound, the leading DeFi protocols of Ethereum assets, Kava prides itself on providing yield earning opportunities to non-ethereum assets such as Bitcoin, XRP, and BNB. HARD gives investors a way to generate cash flow from their Bitcoin holdings, without tokenizing their Bitcoin first.
“With the world increasingly turning to Bitcoin as a store of value and hedge against economic uncertainty, KAVA and the HARD money market services are well positioned as companion products for this new wave of digital asset investors because they provide the rare opportunity for Bitcoin holders to keep their exposure while earning double digit yields safely,” says Brian Kerr, Founder and CEO of Kava.
At the time of writing, Hard Protocol leads the industry in Bitcoin returns, quoting an APY of 41%. Although the rate is not guaranteed, the trend is clear – returns on decentralized platforms are significantly outperforming those on centralized ones for Bitcoin.
Kava Labs is backed by Ripple, Arrington XRP Capital, Digital Asset Capital Management, Hard Yaka, and Lemnis Capital, as well as industry leading partners such as Binance and Framework Ventures.
As more prominent investors continue to engage in the DeFi space, the promise to participate in a better financial system is all too tempting. DeFi-based yield protocols, however, are still in nascent stages, despite their great promise to bring significant efficiencies to fixed income products. There have been several false starts in the space already from YAM Protocol’s smart-contact malfunction to Sushi Swap’s anonymous founder withdrawing developer funds. Investors should proceed with caution when engaging in these new technologies and continue to do their own research.