Summary: While bonds are characterized by predictability and typically lower yields, cryptocurrencies offer the potential for higher yields (and also volatility). One technique crypto investors use to generate wealth is “Mark out“or pledging crypto assets for transaction validation to earn a return.
Although bonds and crypto assets are different assets, today they offer similar annual returns. Bond returns depend on a variety of factors, including interest rates and creditworthiness, while crypto betting involves earning rewards through network validation — a process that comes with its own set of risks.
In this article, we show how bond yields and stake yields compare to each other.
What is yield?
Yield is a key metric in investing and refers to the return that an investment will generate over a period of time. Experts express return as a percentage of the current market value of the investment compared to its original cost.
For example:
- stock return includes price increases and dividends paid. If a stock is bought for $100 and sold for $120 with a $2 dividend, the yield is 22%.
- The bond yield is more variable. For example, the nominal yield is as straightforward as a government bond with a 5% annual interest rate on a $1,000 face value, resulting in a 5% yield. However, floating rate bonds have variable returns based on underlying interest rates, such as a bond with a 10-year Treasury yield of +2%.
- Cryptocurrencies can offer higher returns with higher volatility. That’s because cryptocurrency yield is a relatively new concept, often associated with decentralized finance (DeFi) protocols. Investors can earn a return with cryptocurrencies by staking, providing liquidity (yield farming) and other approaches. This return is a reward for participating in network security or a return for providing crypto liquidity.
What are bonds and bond yields?
A bond is a loan from an investor to a borrower, such as a government or company, for a specified period of time. Yield represents the return that an investor expects over the life of the bond.
Some of the more important factors in understanding bond yield include:
- coupon yield or coupon value is the rate of interest that a bond pays annually and implies a fixed interest rate set at the issuance of the bond.
- Current Yield depends on the price of the bond, which is calculated by dividing the coupon rate by the current market price.
- Yield to Maturity (YTM) is a more comprehensive calculation of a bond’s yield, taking into account the time value of money, maturity value and payment frequency.
For example, if a bond has a face value of $1,000 and pays $100 in annual coupon payments, its coupon rate is 10%. If the bond’s face value increased to $1,038, the coupon would drop to 9.6%.
Note that bond yields and prices are inversely related: When bond prices rise, yields fall and vice versa.
Several factors influence bond yields, including:
- Interest charges – When interest rates rise, existing bonds fall in price, increasing their yield and vice versa.
- credit rating – Bonds are rated from AAA (low risk) to D (high risk or junk bonds) by accredited bodies of the Securities and Exchange Commission (SEC), which affects the bond’s yield.
- economic factors – The general economic situation, inflation and government monetary policy affect returns.
An important concept is the yield curve, which depicts the yield of different bond maturities. It can take ordinary (upward sloping), inverted (downward sloping), or flat shapes reflecting other economic conditions.
In the recent low interest rate environment, bond yields have generally been below historical averages. Nevertheless, they rise together with interest rates:
Bond yields have been falling for years, but have recently risen again due to central bank monetary policy.
What are Crypto Yield and Stake?
Crypto staking is a method to accumulate more cryptocurrency by making funds available for transaction validation. By simply locking the currency in a specific wallet for a predetermined period of time, The underlying blockchain network uses this “staked” cryptocurrency to validate transactions and help keep it secure. As a reward for this service, stakers receive additional cryptocurrencies, essentially making them a form of passive income with no trading or crypto-mining required.
In particular, staking applies to blockchain networks that use variations of the Proof of Stake (PoS) consensus mechanism. In PoS systems, as currently used on Ethereum, users make a “stake” or amount of tokens or coins to earn the privilege of validating transactions. The validation then offers the chance of some return in the form of that coin or token. Staking is similar to earning interest on a fixed deposit, but with higher risk and potentially higher rewards.
It is important to distinguish between staking and yield farming, another passive income method popular in DeFi. Yield farming strategies involve providing liquidity to operate decentralized platforms.
The stake reward in the form of Annual Percentage Return (APY) varies from blockchain to blockchain, ranging from 4% to 20%. For Ethereum, it usually fluctuates between 4% and 5.5%.
Some DeFi protocols, such as Lido, help crypto holders stake without locking their crypto value. They provide spare tokens while the amount wagered is locked and help users explore yield farming opportunities and multiply potential returns.
Bonds vs. Staking: Comparing Matched Returns
As of this writing, the bond yield has closely converged with the cryptocurrency input yield as central bankers rushed to raise interest rates to curb skyrocketing inflation, pushing bond yields higher. For example, AAA-rated U.S. Treasury and corporate bonds offer annual yields of between 4% and 5%.
Moody’s Experienced AAA Corporate Bond Yield.
In comparison, since the introduction of the Proof-of-Stake algorithm, Ethereum’s stake return has fluctuated between 4% and 5% (after a brief spike):
The annualized daily staking return is obtained when staking on the Ethereum blockchain.
However, this is not the standard for all bonds. Lower rated corporate bonds offer higher yields. For example, bonds rated CCC can exceed 12 percent. Likewise, cryptocurrencies, which are more volatile and risky than Ethereum, can offer higher returns that can exceed the 8% mark and be significantly higher. However, there are significant differences in staking rates between currencies.
Here are the staking rewards of the top proof-of-stake cryptocurrencies:
The returns on these two different investment types have only recently converged significantly. Despite the overlapping return numbers, the two types of assets are in markedly different universes, and you should consider the following nuances:
- risks – Bonds, particularly government bonds, are much safer than crypto bets. Fixed income products have traditionally been considered the safest. One of the risks associated with using cryptocurrencies is the high volatility of cryptocurrency investments. If the price of the deployed digital currency falls dramatically, the return may not even cover the loss caused by the devaluation.
- Security – While the underlying blockchain technology might be synonymous with security, staking often involves dealing with centralized third parties that are exposed to risks such as hacking attacks or fraud. Investors should do their due diligence before registering any betting platform. Elsewhere, investing in bonds is generally safe when done with reputable brokerage firms.
- occasions – Despite the higher risks, the use of cryptocurrencies can generate returns that are far in excess of the stake premium. For example, the same volatility can be a favorable factor that multiplies returns when the price of the coin being staked increases. Additionally, many staking platforms are offering spare tokens to explore yield farming opportunities in DeFi while the cryptocurrency being staked is locked. This can multiply the return on investment.
Snack for investors
Bonds typically offer more predictability and lower yields, suitable for risk-averse investors. Vice versa, Crypto bets can yield higher returns but come with increased volatility and riskwhich appeals to those seeking potentially greater rewards.
However, staking cryptocurrencies can become a regular and profitable approach to long-term wealth creation, much like investing in bonds. It just requires more patience, an understanding of the crypto market, and a willingness to show patience over time — just like with bonds.
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