The ability to earn interest on cryptocurrencies such as bitcoin (BTC) and ether (ETC) is a relatively new development, but opportunities have multiplied over the last year as decentralised finance (DeFi) has exploded.
DeFi is a system by which financial products become available on a public decentralised blockchain network, making them open to anyone to use, rather than going through go-betweens like banks or brokerages. In brief, DeFi applications built on blockchains such as Ethereum allow users to lend, borrow and earn interest on crypto assets.
The graph below shows the total value of funds locked up in DeFi applications currently sitting at around $60 billion – an extraordinary leap from less than $1 billion a year ago.
These are crypto funds looking for a yield of 5% a year or more.
Crypto investment company Ovex offers clients an interest account paying 7% a year on bitcoin, and between 9% and 10% a year on stablecoins such as True USD (TUSD), Tether USD (USDT) and Binance USD (BUSD). For clients depositing more than R500 000, Ovex will quote you a premium rate of up to 22% (find out more about here).
This type of interest is generally earned in two ways: by ‘staking’ or putting your crypto to work in the blockchain for rewards, or by outright lending. Both carry risks that your crypto might get stolen (it is rare, but has happened) or that the borrower disappears in a puff of smoke.
“This is why you need to deal with credible operators who understand the risks and do sufficient due diligence to ensure your crypto assets are sent to reliable third parties,” says Ovex CEO Jon Ovadia.
Enhanced yield using ‘Cash & Carry arbitrage’
Ovex recently introduced what is called ‘Cash & Carry arbitrage’ where it exploits price differences between BTC spot and futures prices. Bitcoin futures traditionally trade 3-5% above the BTC spot price, presenting an arbitrage opportunity by selling (going short) the BTC futures contract while simultaneously buying (going long) the BTC spot. The idea is to carry the shorted BTC for physical delivery until the expiry date of the futures contract, at which point the 3-5% profit is theoretically realised.
This type of arbitrage is not without risk, as there may be costs associated with carrying the asset until the future contract expires. You are also at risk of the crypto broker going bust while waiting to realise the arbitrage profit. Another risk is fiat currency risk, as we have seen in the last few weeks as cryptos prices have tanked across the boards. Whatever arbitrage profit is realised may end up being worth 30% less (or more) when converted back to fiat currency.
Ovadia says Ovex clients have been able to earn 18% a year historically, though this is not guaranteed.
“We have been able to do this through a combination of yield farming – hunting around for the best returns on cryptos available in the market – and through Cash & Carry arbitrage using the futures market,” he says.
While the returns are not guaranteed, Ovex says it can guarantee clients’ capital, using its own balance sheet. Ovex recently closed a R60 million investment as part of a R250 million strategic investment round.
“Ovex has built its name as the premier crypto arbitrage service provider in SA, and we continue to develop new services and products that further entrench our position in the market. Our latest innovation is to offer enhanced yield to our interest account clients, and we continue to innovate in this area so that clients can get among the best returns available in this fast-emerging market,” says Ovadia.
DeFi is a relatively new development in the crypto sphere, but as the above graph demonstrates, the opportunities for earning yield are sufficiently compelling to attract more than $60 billion in assets in the space of a year (and higher than $90 billion at its peak).
This has created a new breed of investor known as ‘yield farmers’ who can move funds around with relative ease in search of the best yield (taking into account the associated risks). Exchanges with the best liquidity tend to attract more liquidity.
You can get more information on the Ovex interest account here.
Brought to you by Ovex.
Moneyweb does not endorse any product or service being advertised in sponsored articles on our platform.