Key Points
- Bitcoin’s volatility is both an attractive and daunting feature, but Bitcoin yields can help manage this unpredictability.
- The growth of decentralized finance (DeFi) on Bitcoin has resulted in varied sources of Bitcoin yields.
Bitcoin’s volatility is a double-edged sword – it’s both an appealing and intimidating characteristic. Managing this volatility is crucial, and Bitcoin yields can be instrumental in this process. These yields allow investors to grow their portfolios while shielding them from the most severe market movements.
However, volatility is not a defect; it’s an inherent part of decentralized and permissionless crypto markets. Bitcoin’s high volatility often leads to high returns. But it’s undeniable that this volatility loses its allure when prices are not consistently rising or falling but instead frequently fluctuating in both directions.
Institutional Investors and Bitcoin Volatility
Volatility has been identified as a significant barrier that prevents institutional investors from allocating to Bitcoin, as a Fidelity survey revealed. Large price swings in either direction make an asset highly volatile and therefore riskier because they make prices less predictable.
We are currently experiencing periods between broader bull and bear trends that make volatility unbearable. Yet, as Bitcoin matures, its volatility is decreasing each cycle. The approval of spot Bitcoin exchange-traded funds has caused the asset’s volatility to hit its 2024 peak at 40%, significantly lower than 2021’s record highs of 106%. While it’s premature to declare this as the new normal, the lower volatility means we won’t be seeing a high percentage of gains moving forward.
The Role of Bitcoin Yields
In a highly volatile market like crypto, Bitcoin yield provides the opportunity to earn consistent and stable returns, offsetting some of the price volatility. This steady stream of passive income can be earned without needing to sell Bitcoin. In this way, a Bitcoin holder can put their asset, which has been sitting idle for years, to productive use.
Access to yield-generating opportunities promotes broader acceptance and use of Bitcoin, particularly among institutional investors who are always seeking yield strategies. Even short-term holders may be inclined to hold their Bitcoin for a longer time period if they can increase their investment over time. This can reduce market selling pressure, and as demand increases for yield-generating assets, it can further improve the asset’s price performance.
DeFi Growth on Bitcoin
In the Bitcoin realm, there hasn’t been much development to expand the ecosystem, with the trillion-dollar crypto asset mainly being used as a passive store of value. However, times have changed, and both developers and users want to do exciting things with Bitcoin. This has led to a new wave of development on Bitcoin, resulting in the growth of DeFi on Bitcoin and varied sources of Bitcoin yields.
These yield sources include Bitcoin layer-2 solutions that allow Bitcoin holders to enjoy staking rewards, which are determined by market dynamics. Babylon is another Bitcoin staking protocol built on Cosmos that allows Bitcoin holders to stake their Bitcoin on PoS chains without giving up the custody of their assets.
At pSTAKE Finance, we also offer Bitcoin liquid staking, for which we have collaborated with Babylon to offer boosted yields. While we are starting with Babylon to provide the primary source of liquid staking yields, which is generated through economic security, we will eventually introduce yBTC as well as multiple avenues for yield to offer a diverse range of earning opportunities.
These different solutions not only allow Bitcoin holders to earn yields but also offer Bitcoin miners an additional source of revenue. Moreover, Bitcoin’s decade and a half long resilience and trillion-dollar security can be used to secure other chains.
In the future, Bitcoin yields, which are determined by the market instead of a central bank, may even be used to set the base rate of return for crypto markets, much like how US T-bills are used to set a base rate of return for financial markets.
The yield has far greater and broader implications that go beyond Bitcoin holders and the ecosystem. All this activity and investment into enabling native yield generation on Bitcoin can also lead to a resurgence of DeFi, which took a bigger hit during the 2022 bear market compared to the rest of the industry.
Bitcoin, which is a distributed, battle-tested, and censorship-resistance peer-to-peer network, can lay the foundation for a robust DeFi sector. With Bitcoin being the most accessible and universal asset class that has a capped supply and can’t be printed endlessly, all this innovation can finally lead to the truest version of DeFi.
We are clearly at the beginning of a stellar journey, but for this to become a reality, we need to focus on continued development and innovation to build a better future for our financial and economic systems.
Mikhil Pandey is the co-founder and chief strategy officer of Persistence. Founded in 2019, Persistence is a purpose-built layer-1 on a mission to maximize yield and security through liquid staking and restaking, building at the forefront of the proof-of-stake landscape. Persistence Labs has multiple products in its ecosystem, including pSTAKE Finance, Dexter, and more.
