Co-Founder CakeDeFi & I-Unlimited, Bestselling Author, Keynote Speaker, Medical Doctor, Athlete
I always get a ton of questions from my community on how I make a return on Bitcoin without selling.
Despite many explanations on my part, many people still don't seem to be able to understand it due to a lack of basic financial understanding - which in my opinion should be taught a lot more in school, but unfortunately isn't.
With this article I want to tackle this issue by looking at 4 cash flow strategies that work for different assets (not only crypto) and are regularly practiced by professionals.
The strategies are ordered from lower risk - with accordingly also lower yield - to higher risk, with accordingly also higher yield, of course. Let's start:
On Exchanges such as Kraken, traders can take a long/short position with up to 5x leverage on e.g. Bitcoin.
Leverage means that instead of trading 1 BTC they are now trading with 5 BTC - without owning 4 of those BTC themselves.
They borrow those 4 BTC from the Exchange for a fee - in the case of Kraken, currently about 22% per year (0.01% every 4 hours). Now, Exchanges like Kraken have to get large amounts of BTC from somewhere, and they work with institutional partners who provide them for a share of the fees (e.g. 10% per year).
The risk here is very low, since there is practically only a risk of loss in the event that the exchange goes completely bankrupt, for example. Accordingly, however, the return is also relatively low.
In addition, in order to be an institutional partner, one must usually offer a minimum volume of USD 1 million - meaning the average citizen definitely drops out. This strategy is more suited for companies, like Cake for example.
Perpetual swaps are basically futures, only without a fixed end date. Bitmex was probably the first crypto exchange to offer this service. Since then however, almost every large exchange that also offers futures, offers perpetual swaps as well.
What is special in comparison to the previous strategy: Perpetual swaps can be executed even with little capital and are therefore accessible to everyone. Also a very high return is possible when there is high volatility - not long ago on the exchange Deribit the yield even reached levels around 80%.
However, I would classify the risk here as medium. You no longer only have the risk of a total collapse of the exchange, but also a trading risk: it is unlikely, but it is possible to get stuck on your long/short position if the spot price never reaches the set value again.
Covered options are probably one of the most common strategies for generating cashflow - not only in the crypto area, but in all kinds of areas, including the stock market. We will therefore not go into too much detail in this article about how exactly covered options work.
The most important thing you need to know is that again, you can use this Strategy on virtually any exchange (so it is usable by anyone, not just institutions). For example, you bet that Bitcoin will not exceed a certain price limit for the next 30 days - and, if you're right, you'll get a return on your investment that I would consider medium-high (up to about 25%)
The disadvantage here is clearly that you also have a medium to high risk - if you are wrong and Bitcoin suddenly becomes extremely bullish, you will make a loss.
One thing in advance: with yield farming you definitely have the by far highest risk. You have a systemic risk of the platform going bankrupt (which is definitely within the realm of possibility), you have a trading risk, a smart contract risk... there are many things that can go wrong.
On the other hand, with Yield Farming you can get up to 100% cashflow on Bitcoin!
And although yield farming is theoretically also possible for normal people with relatively small capital, due to the sometimes very high fees of up to 1000 USD for a transaction, it is mostly institutions that operate yield farming.
The whole thing works through platforms like Compound, where you can for example buy "Wrapped BTC". In this case, a centralized company that provides you with their ERC-20 token so you can use it on Compound, Uniswap, etc.
Through these activities, you are conducting so-called liquidity mining, and in return you receive a yield, which is theoretically uncapped - as said before, for example 100% per year are very well possible here.
The strategies mentioned so far were either associated with (medium) high risks (but of course also high upside), or were simply not possible as a normal person with little capital.
There is a way however, through which the low risk and relatively high return of an institution can be achieved even with little capital: you lend BTC to institutional partners, who on the other hand lend them to exchanges, such as Kraken in the first strategy.
This "detour" allows you to secure all the upsides of an institution, but without high administrative costs.
There are already several companies offering this, for example Cake. There you can get up to 9% return on your BTC - since recently even fully insured, thus practically without risk.
Which of these strategies do you like best? I'd be happy to read your feedback in the comments!
Level up your reading game by joining Hacker Noon now!