Forget Speculation: Investors Want Bitcoin for Yield

Bitcoin may still be a speculative asset, but its perception by investors is changing as they seek to earn even more on their newly acquired holdings.

It was just a few months ago that institutions seemed to rush into bitcoin en masse, sending the price soaring to new all-time highs throughout the beginning of this year. Already, they’re looking for yield-enhancing opportunities.

The rush is partly the result of lending and interest-earning products coming out of cryptocurrency companies. BlockFi was the first to offer an interest account two years ago; earlier this month Gemini launched its own interest account. These companies lend the assets out to institutional borrowers for even higher yields and collect part of the spread between the interest paid and the interest charged.

“Bitcoin is still a speculative asset, but as it matures, long term holders and institutional investors are seeking different ways to use their bitcoin holdings productively — either through lending, or as collateral — to create additional portfolio benefits,” Bitwise president Teddy Fusaro told Blockworks.

The trend also furthers the idea that bitcoin and other digital assets can be more than a store of value by utilizing the networks themselves and not merely their tokens.

“Just the way you buy metals, they can be stores of value and hedges against inflation,” tech investor Glenn Hutchins said at an event last week. “But the primary purpose of bitcoin is not to just store the value, it’s to have a use case that makes it valuable.”

A cleaner reputation?

Bitcoin critics have long dismissed it as a speculative asset with no intrinsic value, though its reputation has become cleaner and more respected over the years as the public has learned more about it and it’s received the blessings of highly successful and respected investors.

Still, just last week US Treasury Secretary Janet Yellen called it “highly speculative,” the economist and bitcoin pessimist Nouriel Roubini called it “a total speculative play on a bubble that is self-fulfilling” (a position he’s held onto for many years now). Major banking institutions continue to warn against bitcoin’s speculative nature on a regular basis.  

Today, New York Attorney General Letitia James tweeted that “investing in this unstable market is not prudent and could cause devastating losses.”

There are extreme risks in investing in virtual or cryptocurrencies and it’s imperative that we act to protect investors’ wallets.

I’m warning New Yorkers and investors across the country that investing in this unstable market is not prudent and could cause devastating losses.

— NY AG James (@NewYorkStateAG) March 1, 2021

But bitcoin has also attracted a sweep of high-profile long-term investors, including those who haven’t publicly endorsed the digital asset. And increasingly, banks are looking to serve investors seeking to make digital assets part of their portfolios safely and securely. Diogo Monica, president and cofounder of Anchorage, a digital asset custodian for banks with billions of dollars in custody, said lending is one of its fastest-growing businesses.

“We have hundreds of clients and all of them want to either generate return on their crypto, or use these assets productively,” Monica said.

A productive asset

“Crypto is not just an asset that you sit on, it’s a very productive asset,” he added. “There are a lot of ways for you to generate yield out of it, primarily because it is still a nascent market — there’s not a lot of origination or crypto out there that can be lent out, so the prices are still pretty high and it’s a really good business opportunity.”

One popular use for bitcoin borrowing is called the basis trade, which involves selling futures short and buying at spot prices. For example, if you buy one bitcoin at $50,000 today, you can sell it a year in the future at $60,000 to lock in a $10k profit.

“That’s an instant profit with almost zero risks because futures are collateralized daily” to the tune of 20%, the Dutch institutional investor known as PlanB said on the “We Study Billionaires” podcast earlier this month. “Even if you don’t like bitcoin [or] don’t know what bitcoin is, you can buy bitcoin and sell it immediately at the same time for 20% more and cash the 20% in a foreign exchange of your choice.” 

Also today, Goldman Sachs restarted its cryptocurrency trading desk and will begin dealing bitcoin futures and non-deliverable forwards for clients from next week.

Not every person or company will jump on the opportunity though, Fusaro said.

“Some investors aren’t yet ready to pursue yield generation with bitcoin, some won’t be ready for a long time, and others will never get there,” he said. “There’s significant risk related to seeking yield in bitcoin, and it won’t be for everyone. But it is a space that is growing quickly and we expect to continue to see it grow.”