Dazzled by some insanely high APYs?

Have you noticed that a significant number of DeFi projects are offering insanely high annual percentage yields (APY), which, of course, look very attractive to investors, especially retail investors, who are those most at risk.

There are DeFi protocols that have been built using the proof-of-stake (PoS) consensus protocol offering eye-watering returns to their investors in return for them staking their native tokens. But, as most of us know, sometimes by getting burnt ourselves, if something sounds too good to be true, then it probably is.

The issue is that some projects are nothing more than cash grab schemes. Shiraz Jagati at Cointelegraph gives the example of YieldZard, a project positioning itself as a DeFi innovation-focused company with an auto-staking protocol, which claims to offer a fixed APY of 918,757% to its clients. Who finds that believable? All you would need to invest is $1000 to gain a return of $9,187,570! And YieldZard isn’t the only project offering fast and high payouts.

Assessing an APY

How can you as an investor assess the sustainability of projects like this? Here is some advice from Kia Mosayeri, product manager at Balancer Labs — a DeFi automated market-making protocol. “Sophisticated investors will want to look for the source of the yield, its sustainability and capacity. A yield that is driven from sound economical value, such as interest paid for borrowing capital or percentage fees paid for trading, would be rather more sustainable and scalable than yield that comes from arbitrary token emissions.”

Ran Hammer, vice president of business development for public blockchain infrastructure at Orbs, pointed to the fact that DeFi offers a another major innovation to the crypto ecosystem: the ability to earn yield on what is more or less passive holding. But as he says, not all yields are equal by design because some yields are rooted in “real” revenue, while others are the result of high emissions based on Ponzi-like tokenomics.

Understand the source of the ‘yield’

Ultimately, it is very important for investors to understand where the yield is coming from. For example, transaction fees in exchange for computing power, trading fees on liquidity, a premium for options or insurance and interest on loans are all “real yields.” Whereas those that are based on token inflation may turn out to be less sustainable, as there is no real economic value funding these rewards. 

So, if you see a dazzling APY offered, you should consider all of the above, as well as the fact that most returns are paid in cryptocurrencies, and since most cryptocurrencies are volatile, (just look at the market this week!) the assets lent to earn such unrealistic APYs can decrease in value over time, leading to major losses. 

Are crypto exchanges poised for a growth explosion?

What will the financial sector look like in 2030 after spending the decade challenging the incumbent financial services? Leeor Shimron, a Forbes Contributor, believes that crypto exchanges are poised to capture the growth in this space.

To date, crypto exchanges have provided users with a first contact point with an ever-increasing range of crypto assets. Lets’ not forget that the first crypto enthusiasts were retail investors who for the first time were able to access a new asset class before the institutional investors. As a result, most exchanges, such as Coinbase and Binance, were set up to service demand from the retail investor. For example, as Shimron remarks, “In just 8 years, Coinbase propelled crypto to the mainstream serving over 30 million users.”

Follow the Internet’s history

There have been several commentators who have suggested that the crypto story is very similar to the emergence of the Internet. The Internet was a fundamentally disruptive and paradigm shifting technology, and crypto very well may exhibit similar changes, mimicking the growth in Internet usage.

Illustrating this claim, Shimron cites the statistics: “User adoption of the internet reached 10% of American households in 1995, five years after the first web browser was launched. User adoption reached 50% in the U.S. by the year 2000.” Currently, US adoption of crypto is at around 5%, and hasn’t seen the same rate of adoption as the Internet. This is caused by “issues of scalability, privacy, and ease of use,” something that the Internet also had to overcome.

However, if Bitcoin’s growth story follows that of the Internet, it should achieve user adoption of between 20–50% by the year 2030.

Crypto exchange growth

Shimron applies a similar metric to exchange growth. He writes, “To project future exchange growth in the U.S., I assumed 5% user adoption of crypto in the US currently and calculated revenue growth if user adoption reaches 10% (conservative case), 20% (base case), and 50% (optimistic case) in the year 2029.”

The resulting scenarios for 2029 in terms of exchange revenues are: “$1.9 billion in the conservative case, $3.8 billion in the base case, and $9.6 billion in the optimistic case.”

He also remarks that although the 50% adoption may seem far-fetched, there are indicators supporting it, including ample growth potential amongst retail investors and demographic changes over the next decade, with more 18–39 year olds living in cities and being more familiar with digital technologies and virtual goods. These millennials will also inherit $68 trillion from the baby boomer generation by 2030, and they are looking for new ways to generate yield and store their wealth.

So, the future for crypto exchanges is bright, “as new use cases and killer apps emerge,” alongside retail users flooding the market and exchanges capture this growth.

Blockchain solutions to surge by 2023

According to a new study by CB Insights blockchain tech has gone far beyond its beginnings in banking and cryptocurrency, with annual global spending on blockchain applications having almost tripled since 2017. Furthermore, CB Insights’ Market Sizing Tool predicts this annual spend could shoot up to $16 billion by 2023.

As the report says, everything from insurance and gaming to cannabis and industries are seeing the potential power of blockchain. The big companies, such as Facebook, Amazon, Samsung and LG have already dipped their toes in the water, and LG has introduced it using a “Facial recognition service that combines AI and blockchain to make payments in digital currencies,” according to Luke Fitzpatrick in Forbes.

What does blockhain give to industries? According to Ilker Koksal it provides:

Greater transparency

Increased efficiency

Better security

Improved traceability

And which industries will benefit the most and see the biggest changes by using blockchain applications? Here are the four most likely to make the most of blockchain.

Digital banking

Digital banking has made great progress over the last decade and decentralized finance (DeFi) could be a catalyst for taking banking fully digital. Atul Khekade, cofounder of XinFin said, “The FinTech industry is growing at the rate of 23% year-on-year and blockchain is about to make finance more efficient.” He expects to see traditional finance firms and governments understanding the advantages in the near future, and it is almost certainly the case that countries with large numbers of unbanked people will take advantage of blockchain solutions. If they aren’t already, they should be.

Supply chains and logistics

While banking has been the most prominent user of blockchain, industries that rely on the supply chain sector are also embracing blockchain with good reason. As Fitzpatrick says, “The technology by its very design offers an unprecedented level of efficiency in the recording and tracking of goods,” and this didn’t go unnoticed by IBM for tracking goods. Carrefour, a French supermarket, has also used the technology for the tracking of food products from farms to stores.

Fitness and wearables

Wearable technology had already made big consumer inroads, and the Covid-19 pandemic has increased interest in wearables that monitor steps, heartbeat and calories consumed amongst other things. Herbert Sim, an advisor to BeFaster said, “The fitness is gaining momentum over the past 10 years. According to forecasts, in the US alone, the income of the fitness industry by 2023 will exceed 20 million.” The need for social distancing has also led to new app creations for tracking. Allan Zhang, the founder of DxChain said, “Post-lockdown, the technology could be fully embedded into the wearables industry and this will provide immense value to customers in the long run.”

Asset management

Fitzpatrick says, “According to a recent study, artificial intelligence, distributed ledger technology (DLT) and the blockchain technology will have the biggest impact on asset investments in the upcoming years.” The industry is already valued at $74 trillion. Ernst and Young (EY) said, “Asset managers need to proactively consider valuation challenges arising from the COVID-19 pandemic’s effect on financial markets.” Yubo Ruan, a 23-year-old venture capitalist, said, “Pragmatically, this means financial products like ETFs and mortgage-backed securities can be synthesized on blockchain platforms at significantly lower costs,” adding, “ blockchain-based asset management platforms tend to require lower minimum balances to invest, which is a major positive for adoption.”

We’re back on the bitcoin rollercoaster

Last week the hotly anticipated bitcoin halving took place. As you probably know by now, this event happens around every four years and cuts the reward miners receive for each new coin they create in half. The halving took place without any incident, and bitcoin owners are hoping that they will see the same surge in price that followed the two previous halvings. It has to be said that this is unlikely to happen this month, and we may have to wait for 12 months to see the true effects.

BTC could hit $100,000

Some enthusiastic bitcoin supporters, namely the Winklevoss Twins, said, “We’re set for another order of magnitude step up — whether $20,000 is the bitcoin base, maybe we see $100,000.” As we know, big numbers for bitcoin have been a feature of the headlines for quite some time, but we would all be well advised to take a ‘let’s see’ approach to investing in it.

One thing we must keep a vigilant eye on is the mining community. A halving makes their work less profitable, and it could be that bitcoin would need to sit at the $10,000 mark for them to achieve a breakeven price. Inefficient miners are most at risk, and they may need to liquidate their rewards. This would flood the market with bitcoin, and that in turn could threaten the fortunes of more profitable miners due to a sudden growth in supply of the digital asset.

Billy Bambrough reported on 12th May in Forbes the view of Gavin Smith, chief executive of Hong Kong-based bitcoin and cryptocurrency exchange and hedge fund Panxora, who said, “The recent much-hyped halving, while largely psychological in impact, could create a catalyst drawing new players into the market and contributing to the rise in the value of bitcoin.” That sounds promising, and he added to that, saying bitcoin is at “the start of a multi-year bull phase” though there could be “a bumpy road ahead.”

A hedge against inflation?

There is other interesting activity to factor in, such as more investors using bitcoin as an inflation hedge to protect their assets against currency devaluation. This has been fuelled by the US Federal Reserve pumping trillions into the economy to alleviate the effects of the lockdown. It isn’t the only government to have taken this step, and there is concern that these massive injections may lead to over inflation, as well as out-of-control debt.

Jean-Marie Mognetti, chief executive of digital asset manager CoinShares, commented: “In a world where investors continue to seek protection for their portfolios against the world’s central banks’ behavior, bitcoin, a digital currency whose supply is programmatically defined to reduce until it reaches its maximum supply, would seem to be the perfect hedge for any institutional investor portfolio.”

There is a belief that if bitcoin becomes a safe-haven asset and a hedge against inflation, then its price will head for the Moon over the next couple of years, and we will see that December 2017 price of $20,000. Perhaps $100,000 isn’t so pie in the sky after all.