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Could you earn returns on bitcoin and cryptocurrency? From interest-paying accounts to yield farming, we look at the options and the risks

Expecting cryptocurrency – be it bitcoin, ethereum or whatever – to appreciate is the main way to make money in the world of investing in digital currencies.

But some say it is also possible to make money from cryptocurrency or make returns in other ways with 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a cryptocurrency investor do that, is it too risky and how much faith do you need to put in unregulated and previously unpublished entities that offer the opportunity? We take a look.

With the crypto boom back in recent months, gains were rapid and prices volatile once again.

Since the fall, 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 said that bitcoin could rise up to $ 100,000 by the end of this year, but, as any long-term crypto observer knows, the price could also fall.

However, cryptocurrency is a long-term game for its most interested investors and that means that many have coins that are only kept in wallets with the intention of remaining there for perhaps years.

But can you get a return on how you can get interest on money or stock dividends, 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, Idex CEO of decentralized exchange, says: ‘There are many ways to earn interest in cryptocurrency, including” bitcoin rewards “credit cards, crypto loan services and DeFi (decentralized finance) income cultivation.

“Some of them require little or no knowledge of cryptography (credit card rewards in bitcoin), while others require deep technical knowledge (agricultural production).

‘In general, the more knowledge required or the riskier the investment asset, the greater the potential return.’

1. Interest accounts

Several centralized and decentralized finance platforms (DeFi) 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 fixed on an asset or currency. That currency is usually the US dollar.

DeFi platforms offer people the ability to borrow or borrow from others, trade cryptocurrencies, earn interest on accounts that mimic traditional economies, and more. They are not controlled by a bank or regulated.

As with a traditional bank interest account, you can withdraw your cryptographic assets at any time – although potentially with restrictions – along with any interest you have earned.

When obtaining cryptographic returns, Daniel Polotsky, CEO of bitcoin ATM provider CoinFlip, said: ‘The most common way, for most consumers, is through centralized services like BlockFi and Celcius, which have “interest accounts” that offer to almost nine percent interest on stablecoins and about five to six percent 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 strongly correlated with monetary policy – and with interest rates being lowered to stimulate economies, savers have paid the price.

DeFi accounts can offer higher returns because they do not inhabit a world of currencies affected by central bank interest rates.

But, in this unregulated world, there is no consumer protection to turn to if you invest your digital currencies in them and they break or you lose your cryptocurrency.

Whereas, with a traditional UK savings account, you benefit from the Financial Services Compensation Scheme deposit protection of up to £ 85,000 with each bank or real estate company with an individual license.

To make up for the lack of protection, some DeFi accounts have aligned their offers to existing regulations issued by banks and governments to appeal to users. Some even offer private insurance that investors can purchase. But not everyone offers this.

2. Cashback on a crypto credit card

While the cryptocurrency industry is doing a lot to distance itself from the traditional banking model, it seems that it can’t help but mirror it in some ways.

That is why it is not surprising that some in the industry are starting to offer encrypted credit cards.

At the time of writing, there did not appear to be any such providers offering an encrypted credit card in the UK.

However, there are new providers set to launch in the United States this year: the BlockFi Bitcoin Rewards credit card and the Gemini credit card.

And where any other fintech industry leads, the UK often follows.

BlockFi says on its website: ‘For every transaction you make on the card, 1.5 percent cash back will accrue and then it will automatically be converted to bitcoin and placed in your BlockFi account on a regular monthly cycle.’

Gemini, meanwhile, promises to return up to three percent in bitcoin or other encryption.

David Moss, Strongblock’s CEO, says: ‘Most of these cards are just a different view of traditional card “percentage back” promotions, except that 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 would need to spend on the card to receive the rewards. If you default, you could lose like a normal credit card.

3. Decentralised lending and renting

Decentralized lending is the ability to lend money (digital or not) without the need for an official institution, such as a bank or credit provider, to get involved in the process.

Everything could be automated through a smart contract. There are several 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 is also possible to borrow and rent cryptocurrencies through several centralized online platforms, including one based in London, Nebeus.

Michael Stroev, chief operating officer and product manager at Nebeus, says: ‘We provide our cryptography to low risk and highly secure institutional partners to obtain liquidity. We use another part for reinvestment in several portfolios. We need to be profitable with the six percent we pay. ‘

In addition to not always knowing exactly what happens to encryption when you rent it, there are other conditions to consider, such as the lock-up period. In the case of Nebeus, there are two programs on offer.

The Juniper program offers a 3.5 percent return on the year with a minimum blocking period of one month, while its Sequoia program has customers blocking their money for three months.

Stroev says: ‘This is based on the fixed amount of the encryption on the day the person deposited the encryption. Therefore, if you deposit your bitcoin now, the fee would be set at € 48,309.57 (£ 41,660.67) ($ 57,091.70). We pay the percentage in euros and not bitcoin. We are trying to merge bitcoin and money. ‘

4. Yield farming

Income cultivation, also known as liquidity mining, effectively involves an investor moving their cryptocurrencies to different pools on various DeFi platforms, such as Aave or Compound.

In exchange for bundling your cryptocurrency, you can earn tokens, interest or rewards.

It can be very complex.

Platform Strongblock says: ‘The advantages of agricultural production is that it offers higher returns. The downside is that it is more difficult to use and less predictable. ‘

Again, you are not protected by regulators if you use these types of platforms. But your money can be protected by smart contracts.

As smart contracts are automated, they will be paid according to the terms and conditions of the contract. No person or company involved could withhold money.

  1. Fixation
    Deploying involves blocking your cryptocurrencies on a smart contract to receive rewards. It can be offered through crypto wallets, blockchain networks and exchanges.

Deploying can be described as putting your money in a savings account and earning interest, but it is in that part of the analogy that the similarity ends.

Banks ‘reward’ their customers with interest – albeit a minimal amount at the moment – for keeping money with them, while the platforms you bet your cryptocurrency on reward you for participating in the network ecosystem where your bet helps build new blocks in the blockchain.

Curtis Ting, managing director of Europe at the Kraken cryptocurrency exchange, adds: ‘Staking is a means of verifying transactions on a blockchain.

‘Token holders deposit, or “bet”, cryptocurrency to confirm transactions. This makes it an innovative alternative to mining, which needs mass computing power. ‘

Clem Chambers, CEO of private investor site ADVFN and Online Blockchain, says there are several versions of staking to consider.

He says: ‘You can, for example, bet your coins with a company like BlockFi, which will pay six percent of annual percentage yield (APY) on ethereum.

‘Or you can keep certain tokens in an exchange and automatically receive interest.’

Fees apply and you may also need to have a certain amount of cryptocurrency to get involved in the picket.

The rules, rates and minimum stake values ​​may vary, so it is important to read the terms and conditions carefully and compare the various platforms before choosing the right one for you.

Should you trust platforms offering returns on your cryptocurrency?

If the platform is not based in the UK, there is a chance that it is not regulated, which means that your money is not protected by the Financial Conduct Authority (FCA) if things go wrong.

UK operators need to be licensed, but that can only mean having an e-money license.

With an e-money license, funds are not protected by the Financial Services Compensation Scheme, which compensates for lost bank and civil society savings in the event of bankruptcy of up to £ 85,000 and covers investment issues such as platform collapse , maladministration and financial problems Council.

Online platforms and exchanges are not classified as a bank or mortgage company, so this protection does not apply to them. Not many places that you can buy or maintain encryption will benefit from FSCS investment coverage.

Companies with electronic money licenses still need to implement measures to protect people’s money.

For example, the German payment processor Wirecard was subject to the safeguard rules of the Electronic Money Regulations 2011 and the Payment Services Regulations 2017.

Customers’ money is normally safeguarded by keeping the money separately in accounts at banks or other credit institutions, which means that it must be returned to customers if the company goes bankrupt.

Stroev says: ‘At the moment, we are applying for an electronic money license, issued by the FCA. We also comply with UK and EU regulations, which means that when people sign up to our platform, we do all the usual checks, such as identity and KYC compliance checks. ‘

These platforms can even voluntarily go further to protect users’ funds. In January, Nebeus launched insured safes – a cryptocurrency safe with a $ 100 million (£ 72 million) insurance policy issued by Lloyds of London. Any such insurance must be fully questioned by customers.

Stroev advises: ‘It is important to look at the company’s history and the relationships they have. We work with some of the largest financial institutions and offer insurance and custody services. It is important that customers do their research. ‘

Online platforms and exchanges are not classified as a bank or mortgage company, so this protection does not apply to them. Not many places that you can buy or maintain encryption will benefit from FSCS investment coverage.

Companies with electronic money licenses still need to implement measures to protect people’s money.

For example, the German payment processor Wirecard was subject to the safeguard rules of the Electronic Money Regulations 2011 and the Payment Services Regulations 2017.

Customers’ money is normally safeguarded by keeping the money separately in accounts at banks or other credit institutions, which means that it must be returned to customers if the company goes bankrupt.

Stroev says: ‘At the moment, we are applying for an electronic money license, issued by the FCA. We also comply with UK and EU regulations, which means that when people sign up to our platform, we do all the usual checks, such as identity and KYC compliance checks. ‘

These platforms can even voluntarily go further to protect users’ funds. In January, Nebeus launched insured safes – a cryptocurrency safe with a $ 100 million (£ 72 million) insurance policy issued by Lloyds of London. Any such insurance must be fully questioned by customers.

Stroev advises: ‘It is important to look at the company’s history and the relationships they have. We work with some of the largest financial institutions and offer insurance and custody services. It is important that customers do their research. ‘

Chambers says: ‘It’s best to consider all crypto transactions as‘ risky ’. For starters, there is no government deposit insurance.

“The smaller the company that offers savings interest, the greater the risk. There is a whole menu of risks, from the loss of access to the crypto wallet to hackers and regulators who unexpectedly close an operation. “

Chambers adds that the biggest risk is counterparty risk (the likelihood that a platform or exchange will not retain its share of the business and return your money and interest).

‘Do not dive and imagine that it is Eldorado. The opportunity is to train yourself, improve your knowledge and earn money from it.

“There are fabulous returns to be made – you can earn 13% of revenue – but this is cutting edge technology and you can lose a lot if you just enter without looking.”

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