By this point, many people are committed to holding their cryptocurrency for the long run. There are just so many reasons to be pro-crypto. The U.S. is running its money printers over time. The rate of inflation is through the roof. And, now that El Salvador has started the trend, it won’t be long till other countries adopt crypto. But what if you still want to earn a return on your crypto in the short term? This is where yield farming crypto can be a great option.
What is Yield Farming Crypto?
Yield farming crypto is the process of lending or borrowing crypto in exchange for a return. Lending your crypto to a defi exchange enhances the liquidity of the platform. Since this is valuable for the exchange, they are willing to pay you a return on your crypto. In this sense, it’s not all that different from putting your cash in a bank to earn interest. With that said, there are two main differences:
- Cryptocurrencies still aren’t federally protected. Yield farming is riskier than a bank because there is no regulation. If you lose your crypto for any reason, there really isn’t anyone to turn to.
- Yield farming crypto actually generates a decent return. On the plus side, you can earn a much higher return yield farming compared to using a savings account. Most savings accounts only pay about half a percent in interest (at most). With yield farming, you will normally earn at least 5%.
How Much Can I Make With Yield Farming Crypto?
You can expect to earn anywhere from 5% to over 100% APR from yield farming crypto. For more established tokens, the returns are lower. For newer coins, the potential returns are much higher. However, remember that any investment offering higher potential rewards almost always comes with more risk. Here are the biggest risks of yield farming:
- Rug pulls: This is when the crypto developer raises cash for a project and then abandons it. They essentially take the money and run, which causes the price of the coin to drop to zero. This is the worst-case scenario.
- Price volatility: Yield farming usually requires you to pledge your crypto for an extended period of time. If the price of your coin starts crashing during this time, you’ll be unable to sell it.
- Regulation: There is no telling when the government will decide to regulate crypto. Due to this, potential regulation is always an underlying risk.
As long as you are comfortable with these risks, yield farming can be quite profitable. The total amount that you can earn depends on 4 main factors:
- How much crypto you have and want to farm.
- Your strategy.
- The platform you use.
- The coin you use.
The world of cryptocurrency moves incredibly fast. Due to this, there is no “set” way to yield farm your crypto. Oftentimes, when someone discovers a lucrative farming strategy, it is quickly copied. Once everyone starts using the same strategy, it loses its profitability.
With that said, let’s examine the four best ways to start yield farming your crypto. These are all high-level strategies that you can personalize to fit your financial goals.
What Are The Best Ways To Earn?
The 4 main types of yield farming are liquidity, lending, borrowing, and staking.
- Liquidity: The process of providing your tokens to a decentralized exchange. Providing these coins helps give the exchange more liquidity. In return, the exchange will pay you a small reward. Aave, Uniswap and AQRU are platforms where you can explore this.
- Lending: The process of lending crypto to people who want to borrow it. This is normally done through a decentralized exchange using a smart contract. By doing this, you essentially become the bank and earn interest from letting others borrow your crypto.
- Borrowing: The process of borrowing crypto in order to yield farm with your borrowed coins. Some investors will use their existing coins as collateral to borrow other coins. Then, they will stake their borrowed coins to earn a return. This strategy is a little similar to using margin (borrowed money) to buy stocks.
- Staking: The process of pledging your tokens to the network. By doing this, you are helping to bring security to the network. In return, you earn a reward. These rewards generally range from 5%-10% annually. Of these four, Crypto staking is probably the most common. It is offered by Crypto.com, Etoro, Coinbase, and most other major exchanges.
Is Yield Farming Crypto Right For Me?
The main goal of yield farming crypto is to generate a return on your crypto holdings. Essentially, you offer your cryptocurrency to an exchange in return for a reward. The total amount that you can earn depends on the coin that you want to farm. More well-known coins like Bitcoin and Ethereum will offer smaller rewards. Lesser-known coins will have higher rewards but also come with more risk.
Additionally, yield farming crypto definitely requires a bit of financial and crypto-savviness. First, you will have to make the common decisions that come with investing. Mainly, how should you farm your coin, and is the reward worth the risk? On top of that, you will need to do it on deregulated exchanges. Using defi tools comes with a bit of a learning curve. If you don’t feel comfortable navigating these new tools then it might be easier to just hold your cryptocurrency in a wallet.
However, if you are very familiar with cryptocurrency then yield farming could be a great option. This is because yield farming lets you take more control. If you invest in crypto, there are two main strategies. The first is to buy and hold on for dear life. The second is to try and trade around price fluctuations. Now, yield farming crypto presents a viable third option. In addition to holding your assets for the long run, yield farming also lets you generate an annual return.
I hope that you’ve found this article valuable for learning how to use yield farming to make even more crypto. Please remember that I’m not a financial advisor and am just offering my own research and commentary. As usual, please base all investment decisions on your own due diligence.
A University of Miami grad, Teddy studied marketing and finance while also playing four years on the football team. He’s always had a passion for business and used his experience from a few personal projects to become one of the top-rated business writers on Fiverr.com. When he’s not hammering words onto paper, you can find him hammering notes on the piano or traveling to some place random.