Maximizing returns in a volatile market: The role of Bitcoin yields

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One of the most attractive aspects of Bitcoin (BTC) is its volatility, which is also its most frightening aspect. Managing this volatility is crucial, and local Bitcoin returns can help achieve this. These returns allow investors to build their portfolios while also protecting them from the worst market movements.

But volatility is certainly not a flaw; This is a feature of decentralized and permissionless crypto markets. After all, Bitcoin’s high volatility leads to high returns. However, it cannot be denied that this volatility loses its appeal when prices do not rise (or fall) consistently but fluctuate frequently in both directions.

In fact, volatility has also been identified as a critical barrier preventing institutional investors from investing in Bitcoin, as revealed by the Fidelity survey. Large fluctuations in price in either direction make the asset highly volatile and therefore riskier. This is because volatility makes prices less predictable.

So on the one hand, there are periods between broader bull and bear trends like the one we are currently experiencing that make volatility unbearable. On the other hand, as Bitcoin matures, its volatility decreases with each cycle. The approval of spot Bitcoin exchange-traded funds allowed the asset’s volatility to reach 40%, its peak in 2024; This is much lower than 2021’s record highs of 106%. While it’s too early to tell whether this is the new normal, low volatility means we won’t see high rates of returns in the future.

It’s time for Bitcoin returns

In a highly volatile market like crypto, Bitcoin returns provide the opportunity to earn consistent and stable returns by shedding some of the price fluctuations. This stable passive income stream can be earned without needing to sell BTC. This way, a BTC holder can finally put their asset that has been idle for years to good use.

Access to yield-generating opportunities encourages broader acceptance and use of Bitcoin, especially among institutional investors who are always looking for yield strategies.

Even short-term holders may be tempted to HODL their BTC for a longer period of time if they have the opportunity to increase their investment over time, as they can benefit from both price increases and a steady source of income. This can reduce selling pressure in the market and help the asset achieve a more positive price performance as demand for yield-generating assets increases.

There is clearly a strong case for Bitcoin returns, but where exactly is that return coming from?

The growth of DeFi on Bitcoin

Therefore, there has been no development in the Bitcoin world that will expand the ecosystem; The trillion-dollar crypto asset is used solely 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 led to a new wave of development in Bitcoin, which gave rise to BTC DeFi. The growth of decentralized finance on Bitcoin has led to the emergence of various sources of Bitcoin returns.

These return sources include Bitcoin layer-2 solutions that enable BTC holders to enjoy staking rewards 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 custody of their assets.

At pSTAKE Finance, we also offer Bitcoin liquid staking, where we collaborate with Babylon to deliver increased returns. While we started with Babylon to provide a primary source of liquid staking returns through economic security, we will eventually introduce yBTC and multiple return paths to offer a wide range of earning opportunities.

All these different solutions not only enable BTC holders to earn returns, but also offer Bitcoin miners an additional source of income. Moreover, Bitcoin’s fifteen-year durability and trillion-dollar security can be used to secure other chains.

In the future, Bitcoin yields, which are determined by the market rather than a central bank, could even be used to determine the underlying rate of return for crypto markets, similar to how U.S. Treasury bills are used to determine the underlying rate of return. for financial markets.

So the payoff has much bigger and broader implications that go beyond Bitcoin holders and the ecosystem. All this activity and investment in creating local returns in Bitcoin could also lead to a resurgence of DeFi, which took a bigger hit in the 2022 bear market than the rest of the industry. Moreover, as a distributed, battle-tested and censorship-resistant peer-to-peer network, Bitcoin can form the basis of a strong DeFi sector. All of these innovations could eventually lead to the emergence of the truest version of DeFi, as Bitcoin is the most accessible and universal asset class that has a limited supply and cannot be minted forever.

Ultimately, we are at the beginning of an amazing journey, but for this to become a reality we need to focus on continuous improvement and innovation to build a better future for our financial and economic systems.

Mikhil Pandey

Mikhil Pandey is co-founder and chief strategy officer of Persistence. Founded in 2019, Persistence is a purpose-built layer-1 at the forefront of the proof-of-stake landscape with a mission to maximize efficiency and security through liquid staking and restaking. Persistence Labs has multiple products in its ecosystem, including pSTAKE Finance, Dexter, and more.