Since crypto hit new highs in late 2021 new ways are popping up to get the most out of it. From day trading to taking long positions, yield farming is proving a good alternative for those who do not want to let go of their precious assets.
Blockchain has been at the core of crypto for over a decade. While other means exist, decentralized finance is an implication that has made yield farming possible today. Plenty of places online offer the service, and if the markets are steady, crypto stored in a yield farming account brings the investor some returns. The following ideas explains the insights of yield farming and what is APY in crypto.
Choosing a Yield Farming Account
Before anything can happen, an investor must have an account that supports yield farming. Not just any crypto account can do this. Some notable places online and offline offer the service, which comes at a small price.
Like ordinary interest-earning accounts taking cash, crypto ones in PrimeXBT or any other platform require a commitment of up to a year. The period could be less or more depending on where an investor opens the account. Once the account hits maturity, investors can earn their interest.
Platforms like PrimeXBT are veterans in offering APY in accounts called covesting accounts. The accounts are easily accessible on the internet and accumulate interest over the period set.
How Does Crypto Gain Interest?
Crypto instruments are valuable financial tools, which work similarly to other investments. For example, a gold investment today might be worth more at the peak of a bullish market run for the commodity, meaning that the owner will reap more than what they kept in storage.
Crypto relies on demand and the willingness of other people to supply it to increase in value. If more people want Bitcoin, then the value of the commodity will peak. However, if more people prefer not to have the commodity, the value will plummet.
Some situations push people into a massive sale of their crypto commodity. For example, when interest rates are set high, people prefer to have less volatile assets like crypto. When such situations present themselves, the value of crypto will plummet. Similarly, the value of government-backed bonds and other not-so-volatile commodities will rise.
The likelihood of all tradable commodities being in a bad run is low at any given moment. Investment firms, those offering yield farming, take advantage of the situation. When crypto is having a good run, they focus their investment on crypto. However, they will switch their attention once other commodities gain momentum.
Most firms, including PrimeXBT, expose the assets deposited in interest-earning accounts to other high-yielding instruments, which protects the downside and guarantees some returns for the investors. However, some extreme circumstances can lead to significant losses of the assets deposited in accounts. The post-Covid-19 inflation is a notable example of a situation that affects the performance of different commodities.
Borrowing and Lending in the Blockchain
In conventional money accounts that gain interest, putting money in an account is more like lending money to the bank or a financial institution. Alternatively, taking a loan is borrowing, only that the bank or the loan facilitator will require more money paid back to cover the value of money lost in the duration of the loan. Yield farming in decentralized protocols works the same.
Some crypto protocols running in different blockchain networks accept deposits from different quarters, this happens by allowing wallet holders who have a significant amount of crypto to give it away in return for more after a while. The crypto assets accumulate and work as a liquid pool, which helps to chase more assets when the markets allow it.
Why Consider Yield Farming?
Holding money in a crypto wallet is an investment, which can amount to a lot when the markets take a favorable turn. However, it might take a long time for crypto markets to rise to give a significant sum back.
Chasing high-yielding assets in the blockchain or outside of it can provide a faster way to get better returns. Noteworthy, pushing assets to extremes to get better returns exposes them to greater risk.
Will Yield Farming Become Big In Crypto?
The direction of the crypto markets decides if yield farming will become substantial in the next five years. Better runs by a majority of crypto mean more interest on stored commodities in yielding accounts. Further, poor runs might discourage the issue. Other factors such as the government’s attitude toward the asset and the utility of crypto might be imperative in validating yield farming in the future.