Maximizing returns in a unstable marketplace: The position of Bitcoin yields

One of Bitcoin’s (BTC) most attractive features is its volatility, which is also its most daunting aspect. Managing this volatility is key, and native Bitcoin yields can help achieve this. These yields allow investors to build up their portfolios while protecting them from the worst of market movements.

But volatility is by no means a flaw; it’s a feature of decentralized and permissionless crypto markets. After all, Bitcoin’s high volatility leads to high returns. However, it can’t be denied that this volatility loses its charm when prices are not consistently rising (or falling) but instead fluctuate frequently in both directions.

Volatility, in fact, has also been identified as a critical barrier that keeps institutional investors from allocating to Bitcoin, as revealed by a Fidelity survey. Large swings in price, in either direction, render an asset highly volatile and thus riskier. This is because volatility makes prices less predictable. 

So, on the one hand, we have periods between broader bull and bear trends, like we are experiencing right now, that make volatility unbearable. On the other hand, as Bitcoin matures, its volatility is shrinking each cycle. The approval of spot Bitcoin exchange-traded funds has the asset’s volatility hitting its 2024 peak at 40%, far lower than 2021’s 106% record highs. While it’s too early to say if this is the new normal, the lower volatility means we won’t be seeing a high percentage of gains going forward.

It is time for Bitcoin yields

In a highly volatile market like crypto, Bitcoin yield gives the opportunity to earn consistent and stable returns, hedging some of the price volatility. This steady stream of passive income can be earned without needing to sell BTC. In this way, a BTC holder can finally put their asset, which has been sitting idle for years, to good use.

Having access to yield-generating opportunities further promotes broader acceptance and use of Bitcoin, especially among institutional investors who are always looking for yield strategies. 

Even short-term holders may get inclined to HODL their BTC for a longer time period if they have an opportunity to increase their investment over time as they get to benefit from both price increases and a constant supply of income. This, in turn, can reduce market selling pressure, and as demand increases for yield-generating assets, it can further help the asset enjoy a more positive price performance. 

There’s clearly a strong case for Bitcoin yield but where is this yield exactly coming from? 

The growth of DeFi on Bitcoin

So, in the Bitcoin realm, there hasn’t really been any development to expand the ecosystem, with the trillion-dollar crypto asset only being utilized as a passive store of value. But now, times have changed, and both developers and users want to have fun and do exciting things with Bitcoin. This has led to a new wave of development on Bitcoin, which has given rise to BTC DeFi. The growth of decentralized finance on Bitcoin has resulted in varied sources of Bitcoin yields. 

These yield sources include Bitcoin layer-2 solutions that enable BTC holders to enjoy staking rewards, which are determined by market dynamics. Babylon is another Bitcoin staking protocol built on Cosmos that allows BTC holders to stake their Bitcoin on PoS chains without giving up the custody of their assets. 

We at pSTAKE Finance 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.

All these different solutions not only enable BTC holders to earn yields but also offer Bitcoin miners an additional source of revenue. On top of that, Bitcoin’s decade and a half long resilience and trillion-dollar security can be utilized 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.

So, 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. Moreover, 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.

Now, to conclude, 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 in order to build a better future for our financial and economic systems. 

Mikhil Pandey

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.