Yield farming is “easy money” for crypto investors, right? Not so fast. This stuff gets complicated quickly, and DeFi can be confusing for beginners. The good news is, there are plenty of ways to earn yield with Bitcoin, Ethereum, and other tokens, that don’t require a lot of time or complexity. We’ll show you how to get started earning yield with some simple, easy to understand strategies.
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What Is Yield Farming in Decentralized Finance (DeFi)?: “Yield farmers will use very complicated strategies. They move their cryptos around all the time between different lending marketplaces to maximize their returns. They’ll also be very secretive about the best yield farming strategies. Why? The more people know about a strategy, the less effective it may become. Yield farming is the wild west of Decentralized Finance (DeFi), where farmers compete to get a chance to farm the best crops.” (Binance Academy)
BlockFi Regulatory Developments: “BlockFi’s BIAs have been the subject of recent activity by securities regulators in New Jersey, Texas, Alabama, Vermont and Kentucky, and we are in active dialogue with these regulators. We believe that our products and services are lawful and appropriate for crypto market participants, and we remain steadfast in our commitment to protect consumers’ rights to earn interest on their crypto assets. We welcome discussions with regulators and believe that appropriate regulation of this industry is key to its future success.” (BlockFi.com)
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Cryptogic is THE show for crypto investors who are focused on long term results. Follow Scott Hawksworth and Andy Hagans as they explore the investable world of blockchain technology, NFTs, Bitcoin, Ethereum, and other cryptocurrencies.
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– [Scott] Hello, and welcome to another episode of “Cryptogic.” I’m your host Scott Hawksworth, joined once again by Andy Hagans, co-founder of “Cryptogic.” And we’ve got a great show for you today. We’re going to be addressing a question that our friend, Jimmy, sent in. And he has got a five-figure investment in crypto, and he’s heard a lot about getting yield on that crypto and yield farming specifically.
And Jimmy wanted to know from us, “What can I do? How can I get yield on my crypto holdings?” And I think it’s a great question because, you know, way back, in terms of cryptocurrency, used to just be huddle, and you have that store of value, you have your crypto, and you’re good there. But as the technology has developed, as decentralized finance has kind of emerged, we’ve seen a lot more interest in getting your cryptocurrency to work for you, and basically realizing that if you’re going to, you know, have assets, you want them to be earning you return.
You want that yield. So, Andy, Jimmy had the question, “What is yield farming?” Let’s start there, right?
– [Andy] Well, he asked about yield farming, and I think right off the bat, you know, we need to address the fact that a lot of people asking about yield farming don’t actually want yield farming, they want to earn yield on their crypto, right? I guess in the broadest possible use of the word, you know, you could say yield farming is earning, you know, high yields by putting your crypto to work.
But usually, you know, the term is used in the context of DeFi, you know, in pretty specific situation where someone is staking or lending their crypto to a liquidity pool to generate yield. And then, you know, a lot of times using leverage. And I guess, my message to Jimmy, or for a lot of people who are new to this, is it can get pretty complicated pretty fast.
And if you don’t know what you’re doing, you have to be very, very careful because, you know, there all kinds of risks, including the risk of total loss of your principle. So we’re going to talk a little bit, though, about yield farming, but also how to earn yield on your crypto if you’re more of a beginner. If you’re more new to the crypto game and you want, you know, a simple solution.
And before we even get into that technical stuff, Scott, I just want to point out how awesome it is that we’re talking about putting capital into crypto, and then using it to earn yield as an alternative to investing in bonds. I mean, isn’t that crazy that we’re talking about…like we’re literally saying, well, you got two options, the bond market or crypto?
I mean, obviously, you have equities too, but that’s just so fascinating to me that the bond market is so overmanipulated by the Fed that interest rates are so negative in real terms, in the bond market, that we’re legitimately sitting here in 2022 and going, “Yeah, you know, crypto is a better option to earn yield than the bond market for that type of investor.”
Obviously, crypto has its own risks. But I just find that amazing…
– You know, Andy, I love that you mentioned that because I think there is just this idea in investing that the capital’s going to go where there’s that best opportunity for return and growth.
– The efficient frontier. That’s the efficient frontier. Yeah.
– Exactly. And so there are, you know, whether we’re talking about just earning yield on crypto or yield farming, there are lots of whales out there that are investing a lot of their capital into doing this and because there is that opportunity for really attractive yield. So I think that’s a great point to make of, wow, it’s incredible to think, you know, no one would’ve thought about this a few years ago necessarily, right?
– Yeah. And so let’s dive into yield farming at least briefly and talk about that. So, you know, if you’re newer to crypto, you have to understand yield farming, it’s taking place in this DeFi universe and these dapps. And typically, what users are doing is they’re borrowing, they’re using margin to take their capital, stake it in a liquidity pool, but doing so with leverage.
So then whatever API, or rewards, or yield that they’re earning, you know, by staking or lending to the liquidity pool is magnified because of the leverage. But, you know, these APYs, they can change overnight. And with some of these lower market cap tokens, the prices are subject to wild swings, even more volatile than Bitcoin or ETH, which have had plenty of volatility on their own lately.
So I just want to reiterate, you know, really doing yield farming right, it’s going to be almost a full-time job. And, like, a lot of the people that are making a lot of money on it, they tend to be more institutional players, very sophisticated, watching it very closely, you know, minute by minute, definitely day by day. And then I think there’s also another crowd that’s sort of playing in that DeFi pool with smaller amounts of money, but they’re very comfortable with the extreme risk.
And it, you know, Scott, it’s almost like a video game or something.
– Well, you know, I’m glad you mentioned that because this is not, if you’re yield farming, it’s not the kind of thing where you just set it and forget it. You want to actively be watching, you know, the price movements of whatever cryptocurrency you’re lending out, whatever cryptocurrency you’re, you know, building leverage with. Whatever you’re doing there, that is really important to stay connected and up on that because if we have, like what was it, Black Tuesday, if you have something like that occur, you can very easily lose everything, be subject to liquidation because of the protocols, and then you’re kind of boned.
– Right. Right. And by the way, which is all fine, and I absolutely encourage people to play in the world of DeFi, but just to kind of acknowledge where you are on that path. If you’re newer, and you’re less sophisticated, and you’re still learning, I always say, you know, segment your real investment portfolio, segment out some play money if you want to play.
There’s nothing wrong with that. Day trading, crypto trading, in some of these more speculative tokens, playing with DeFi, playing with yield farming, there’s nothing wrong with that at all, Scott. I mean, it’s almost like a hobby, right?
But don’t do that with your entire portfolio, unless, you know, you understand the risks, and you totally understand what’s going on, and you have some experience. So what I’m going to recommend Jimmy do, and frankly, if you’re newer to the world of crypto or earning yield on your crypto, I would say start simple, right? Start with something that’s, you know, relatively safe, relatively simple.
And Jimmy asked me specifically what I’d do. And so, you know, full disclosure, skin in the game, all that sort of thing. I’m just going to say what I do just to keep it simple. I’m a real simple investor, right? I’m always learning. I like to learn about, you know, all kinds of new tokens, new cryptocurrencies, same thing with stocks and ETFs and all this kind of stuff.
But then when I look at my own portfolio, it’s pretty boring, right?
– Yeah. I always like that analogy, and I use this for myself of, Vegas going to the craps table. I love just playing the pass line. Just play the pass line.
– Well, and honestly, a simple portfolio strategy over the long run I believe can outperform, right? So that’s kind of my main portfolio. And then I have, like, kind of my separate play money, where I can play in DeFi, I can speculate. You know, for me it’s almost like playing poker or whatever, it’s fun. But with that major crypto holding, I want to talk about Bitcoin and ETH, right?
Let’s talk about the two main tokens because for a lot of people, those are the anchor of their portfolio. And so with Bitcoin and ETH, we have some different options here. But, you know, even sort of a meta concept is, where do you park this crypto? You know, do you hold it in a wallet, or is it going to be, you know, at an exchange, at a coinbase, or at like a BlockFi?
Those are the two, you know, companies I’m going to talk about today. And different people have different thoughts on that and security risk, and even some philosophical differences on where they park their crypto, how they park it, what kind of wallet they use.
– And the complexity as well. Is it easier to go to a centralized exchange and just kind of sign up? Yes. Yes, it can be as opposed to going the other way with it.
– And the fact is that, you know, between the very early adopters of crypto and, you know, most investors who are getting started now, there is going to be a difference. And most investors, they want simple and easy. I mean, that’s just the truth. That’s just the way it is. So we’re going to talk about simple and easy today.
So let’s start with ETH, all right? So ETH is a little bit of a special case because it’s migrating to ETH2. And so, you know, with ETH, you actually have…even just between Coinbase and BlockFi, you have more options.
So what I do with my ETH, I’m staking it, you know, to ETH2. And right now you can do that at Coinbase and earn, I think it’s 4.5% APY. Now there are some risks with staking. I mean, how to evaluate the risk of that, you know, migration to ETH2. I’m not going to get into that.
I’m just going to sort of say I have mine staked. So I’m obviously comfortable with that risk, but there’s always tail risk. There’s always tail risk. So understand there’s no such thing as a free lunch.
– And [inaudible] baby.
– Right. Right. When I look at 4.5% APY and I compare that to the yield on the 10 year, I’m comfortable with that. Now obviously, there’s more volatility with ETH than there is with the 10-year, you know, treasury but there’s more upside as well. And I think 4.5% in today’s world is pretty good, the fact that you can get it pretty much by clicking a button, you know?
– Beats a USD savings account, let me tell you.
– Yeah. Right. Right. Let me actually rewind. So if you’re a Coinbase user, I believe when you sign up, you automatically get an account at Coinbase Pro, right?
– So that’s where I recommend that you transact your crypto. So if you’re going to buy a big bag of ETH, do it on Coinbase Pro, you can transfer it for free over to Coinbase regular, Coinbase classic. At Coinbase, you can stake it to ETH2 and earn 4.5% APY. I mean, so I think that’s a great option to start earning yield right away.
It’s not complicated, the risk of migrating to ETH2. There’s some risk there, but you can kind of wrap your head around it. You don’t have to play in DeFi if you don’t want to. Simple. Simple, simple, simple.
– Okay. Now I want to talk about some lending apps, and Bitcoin, and some of these other tokens that you can earn yield with. So again, META, before we even get into Bitcoin or the tokens, we have Celsius, we have BlockFi, we have a lot of these, you know, apps where you can sign up and park your crypto there, or sometimes buy and sell crypto there.
Although I usually don’t recommend that because, again, the fees are very low at Coinbase Pro. So I recommend, you know, if you want a simple solution, transact at Coinbase Pro and then, you know, send it elsewhere with whatever you’re going to do, however, you’re going to earn your yield. I like BlockFi personally. I’m a user at BlockFi, and I prefer it to some of these other apps and exchanges because, I can’t remember, it’s New York or New Jersey, but it’s headquartered in the United States.
You know, there’s even been some headlines lately about how there’s some friction between BlockFi and regulators. And you could look at those headlines as a bad thing, but I don’t. I look at them as a good thing from a risk perspective in the sense that because BlockFi is headquartered in the new United States, the fact that they’re even sort of playing ball with regulators…
– But they’re having those conversations.
– Exactly. Exactly. That’s a qualitative difference between another company that’s headquartered overseas, right? So BlockFi, it’s still not going to be FDIC insured. I’m not saying it is. Nothing like that. But at least it’s located, domiciled in the United States.
Again, I can’t remember if it’s New York or New Jersey. And so it’s covered under those state laws, U.S. federal law. So to me personally, it gives me a little bit more comfort. And I know that they use, I believe it’s Gemini and maybe also Coinbase for where they park the crypto as a custodian, so to me, they’re just a company that’s on the up and up.
Now on the flip side, we’re going to talk about the APYs they’re offering with their interest accounts. Their APYs tend to be lower than what you can earn elsewhere. But what did I say earlier in the program, right? There’s no free lunch. So to me, BlockFi…
– It’s part of the trade-off, right?
– Exactly. Risk/reward. So, if you go over to BlockFi and you’re like, okay, their interest account is paying a 4.5% APY, and someone else, a competitor is paying a 9%, or 10%, or 11% APY with that same token. And we need to talk apples to apples. So Bitcoin to be Bitcoin, or ETH to ETH, or Solana to Solana. So you have to be talking about the same token, but if on a token to token basis, they’re offering double, or triple, or something, the APY, there’s a reason why, right?
And so if you, you know, lend out your crypto on those other platforms, I guarantee you’re taking on more risk. I may not even know exactly what risk it is, right? Because I don’t know necessarily the ins and outs of how that platform is earning the yield, but I guarantee you they’re taking on more risk to earn that increased yield.
So that’s why I generally… So for Jimmy’s, his sake, where he’s going to start, I would say start with BlockFi. And so what BlockFi is, they’re more a lending platform. So they have these interest accounts. You can set up a crypto interest account. And let me pull up the page right now here on my web browser. So right now, they’re paying 4.5% on ETH, 4% on Algorand.
Let’s see. I don’t see the Bitcoin number. I think it’s…I want to say it’s 4.5% on Bitcoin. That’s only up to a certain amount of Bitcoin. That might be like 0.1 Bitcoin, where they pay that 4.5% APY. And then the APY plummets, I think to 1%.
And then past, I don’t know if it’s 0.3 Bitcoin or around there, then it plummets to like a 0.1% APY. So I think for a like a four-figure, maybe very low five-figure amount of crypto, I think BlockFi is a great place to park some crypto, begin earning some yield. And of course, there’s some risk because from what I understand, you know, they’re earning the yield by lending out that crypto.
But I think just given how transparent BlockFi is, I think they’re a relatively transparent company, you know, again, comparatively. Compared to some of these other platforms, I think they’re relatively transparent. The fact that they are domiciled in the United States, the fact that they’re, you know, even in discussions with regulators, just personally, I trust them more. So I guess, Jimmy, to give you a really simple answer what I’d do, bought some ETH on Coinbase Pro, I’ve bought Bitcoin on Coinbase Pro, shoot some Bitcoin over to BlockFi where it can earn some yield.
Not too much, though, because again, over a certain amount, the APY plummets. With ETH, you could do the same thing. You could send it to BlockFi, earn interest on it in that interest account. And again, after a certain balance, the APY starts to really take a nosedive. So again, it’s only worth doing for a certain amount. And then another option for ETH is to send it on over to Coinbase, or there’s other perfectly good platforms where you can stake it towards that ETH2 migration and earn, you know, a 4.5% or 5% yield.
To me, that’s a great option to take a four or five-figure balance of crypto holdings, start earning some yield on it right away without a lot of complexity, without taking on a lot of risk. You’re not going to touch the kind of yield, the kind of APY, that people are getting with true yield farming in the world of DeFi, but you are going to earn more APY than the bond market, certainly more than in your savings account.
So I think that’s a great place to start.
– Yeah. And I’d say comparatively too, as we’ve mentioned, you also won’t be taking on quite as much risk as you might if you started trying to right away march into that yield farming world, especially if you, for example, don’t even have, you know, a hot wallet or something, and you’ve just been previously playing on a centralized exchange, right?
– Yeah, exactly. Exactly. And again, I encourage people. Actually, I love the world of DeFi. I love all these apps that have popped up. I mean, I think some of them are going to go boom, some of them are going to go bust. Some of them will survive and will thrive, right?
And that’s all part of the process of being part of a new industry that’s moving very quickly. So I absolutely encourage people to play, but again, my advice is to kind of segment out that sort of the funny money, the play money. Whatever amount of money you’d be comfortable taking into a casino, if you’re a responsible gambler, you know, take it into a casino just for a night of fun.
That’s how, you know, I treat that money. Until you’re more sophisticated, until you actually understand what’s going on in the liquidity pools and the risk there, until you really understand the risk, you know, of using margin if you’re using margin. And just understanding that there are some very sophisticated people doing yield farming that may be ahead of the curve, right?
And it’s that old saying, if you’re sitting at the poker table and you don’t know who the sucker is, that means it’s you.
– It’s you. No, I love that you mentioned that too because maybe Jimmy was hoping we’d tell him some crazy, amazing yield farming strategy that we have to get our yields up to 30% or whatever it would be APY. And the truth is, is folks that have those sophisticated really effective strategies, if they start telling everyone about them, they aren’t going to be effective strategies any longer.
And so when you get into this yield farming, you have to consider that aspect of it and consider who you’re going up against and how, you know, this is not information and strategies that everyone is just standing on the corner sharing free will, you know?
– Yeah, absolutely. And again, with stable coins paying 8%, 9%, and then you can stake ETH and get 4.5% or 5% lend out, certain amounts on BlockFi and get 4.5% and 5%, I mean, those yields are pretty good compared to the world of TradFi.
So, you know, I guess it’s just the philosophy of don’t be too greedy, and especially if you are newer to this. You know, park it and absolutely start earning some yield. You know, and you can kind of wade into that other world a little bit more slowly, and get your feet under you and, you know, kind of learn what’s what. But a 4.5% or 5% let alone 8%, 9% with stable coin, that kind of yield is nothing to sneeze at in 2022.
You know, hate to break it to people, but even with these rate hikes, the bond market is not going to “normalize.” I don’t see that happening. They can raise the rate two or three, maybe four, maybe even five times this coming year, I still don’t see bond yields getting above the inflation rate, right?
So the bond market is likely to remain negative yielding on a real basis for quite some time. And so I think even these, you know, lower yields offered by these more transparent and, you know, “safer ways of earning yield in the world of crypto,” I think there are a pretty good deal, really.
– Absolutely. So, Jimmy, hopefully, you feel we answered your question, and you’ve got some ideas now on where to go and how to pursue some yield on your cryptocurrency holdings there. And of course, if anyone else has other questions for us, always feel free to reach out. You can actually email me, email@example.com.
And, Andy, thanks again so much for joining me and sharing a bit of your insights on getting some yield there.
– Thanks, Scott. It was fun.