Investors have warned that ‘yield’ crypto products are not bonds


It is not often that an investment can be compared to both safe and standard bonds and risky venture capital holdings. But this is currently happening with certain patterns of crypto assets – as new developments in digital finance continue to distort old definitions.

As investors invest billions of dollars in new Bitcoin tracking ETFs in the United States, the debate over the usefulness, if any, of cryptocurrencies in wallets is changing.

Bitcoin, the world’s largest cryptocurrency, has been compared to “digital gold” by many investors, who believe it can serve as a defensive asset against inflation and a counterweight to other risks.

However, some investors are wondering if some crypto-based strategies could be an alternative to holding bonds as a source of fixed income stream. And this is becoming an area of ​​growing interest with bond yields stuck at low levels and the amount of negative yielding debt around the world near record highs.

Currently, there are a number of ways that investors can seek passive returns through the crypto markets.

First, it is possible to lend money to other parties on centralized and decentralized crypto platforms, and to earn competitive interest rates. For example, SEBA – the regulated crypto investment bank in Switzerland started by two former UBS employees – has launched a service that allows its clients to earn interest through decentralized finance (DeFi) and crypto lending, with yields ranging from 3 to 13%.

“We have more and more requests from institutional clients for the yield product,” said Guido Buehler, Managing Director of SEBA.

Likewise, the volume of smart contract loans traded on the ethereum blockchain has grown from $ 3 billion to over $ 26 billion, according to data from research provider CryptoCompare.

Second, revenue revenue can be generated through ‘staking’: by locking down your cryptocurrency assets to help manage the blockchain on which transactions are recorded, allowing you to earn crypto rewards in return.

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Goldman Sachs analysts compared the “staking return” paid by some blockchains to dividends paid on stocks. They also said that the feedback on the DeFi service offering has most likely contributed to their growth over the past year. Figures from CryptoCompare show that the staking volume on the Ethereum blockchain increased from $ 65 million in January to $ 4 billion in October.

During the same period, the value of stablecoins – cryptocurrencies backed by holdings of conventional currencies – that were pledged in exchange for returns rose from $ 2 billion to $ 19 billion. Max Boonen, managing director of one of the biggest cryptocurrency trading companies, B2C2, even believes “crypto bonds” that pay out in stablecoins are imminent.

But this increase in productive crypto investments has drawn close scrutiny from groups offering products to the public. U.S.-listed crypto exchange Coinbase abandoned its efforts to launch a yield offering called “Earn” last month, after the U.S. Securities and Exchange Commission threatened legal action if it went from the before.

Many US regulators are of the view that a product offering to pay interest on crypto deposits to the public is technically a security. Therefore, providers must comply with financial rules relating to the issuance of securities, such as the obligation to register with the authorities.

Several companies that have already started offering these interest-bearing accounts are now being sued by state regulators. New York Attorney General Letitia James last month ordered two anonymous crypto lending platforms to cease operations in the state. Authorities in several other states have also said lenders BlockFi and Celsius have violated their securities laws. Both companies have denied the allegations.

3% -13%

Interest rates offered by decentralized finance and crypto loans

However, crypto yield offerings aimed at institutional fund managers and professional investors are not subject to the same regulatory constraints as products intended for the public.

Despite this, experts say investors should be very careful about drawing parallels with conventional fixed income investments, given the extreme volatility of cryptocurrencies, their relative lack of regulation, and the risks associated with supporting projects. early stage cryptography.

“Frequent protocol bugs and hacking losses are typical features of new technologies and reflect the immaturity of the [DeFi] industry, ”Goldman Sachs warned.

Buehler of SEBA Bank uses a different analogy to explain crypto yield products to potential investors. “This offers a similar opportunity for some cryptos that we saw maybe 25 years ago for real estate,” he argues. “You are buying an asset that has significant upside potential while creating a significant return. ”

However, some investors are more cautious. Peter Edwards, Managing Director of Australian family office Victor Smorgon Group, which has started moving a small percentage of its assets to crypto, sees Bitcoin as an alternative to gold, but sees all other crypto opportunities as more risk. raised.

“Anything called a coin, [we] Think of it essentially as venture capital, ”he says, comparing projects to untested start-ups whose value is based on their potential for future returns.

But Edwards admits that the returns offered in DeFi are attractive. “While investigating the DeFi space, I was surprised at the returns that could be achieved with certain hedging policies that limited your risk,” he says. “[A] The 6.5% return is huge today.

A lack of attractive yields elsewhere has undermined the conventional strategy of holding 40% of a portfolio in bonds and only increased the appeal of crypto, according to Ruffer, the British wealth manager who invests $ 1 billion in Bitcoin.

As Duncan MacInnes, chief investment officer at Ruffer who helped manage his stake in Bitcoin, explained earlier this year: “The rise in the price of bitcoin has been pretty rational in the sense that investors need to take action to more and more drastic to protect themselves against inflation than to do with the 40% of their portfolio that does not bring in anything.

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