– Introduction
– Why should I care about returns on cryptocurrencies?
– Yield farming vs. crypto staking vs. liquidity mining vs. cryptocurrency lending
– What is Halal for a Muslim?
– What is Halal on Binance?
– What did I buy?
– Conclusions
As regular readers know, Mohsin and I invested in cryptocurrencies this year and have had a steep learning curve.
In the past we simply bought and held coins, but lately we have been thinking about making a profit from crypto and have our practical advice on the Islamic analysis we did as well as where we bought it (and what we bought – for what little that is shared is worth).
We specifically focus on Binance as a crypto exchange – as that is where we conduct the majority of our trading. Plus, it's an exchange that's completely labyrinthine to set up, so we thought it would actually be helpful to give people some guidance along the way.
Why should I care about cryptocurrency returns?
And crypto these days offers significant annual returns ranging from 3% to 40% (and I've even seen up to 90%). Of course, the higher the annual return, the more speculative it is as a rule. But even at the low end, these returns are around three to four times what the best mainstream savings accounts offer (although they are, of course, much safer).
The numbers don't lie
To clarify, let's give some concrete numbers. Let's say you invest in Bitcoin. In the last 4 years it has increased fivefold. Let's assume that it continues to grow over the next four years and increases returns threefold. If you invest £5,000 with a total return of 10% over 4 years, the return without capital growth would be around £7,500 and with capital growth you would be closer to £20,000 to £25,000.
Without any income activity, your return would be closer to £15,000.
So that's a 40-60% improvement in overall return.
Long story short, if you are already investing in cryptocurrencies for the long term, it is worth exploring the safer ways of generating income simply because they will significantly increase your bottom line.
What is Yield Farming vs. Crypto Staking vs. Liquidity Mining vs. Cryptocurrency Lending?
We've discussed staking in more detail here, but in short: you can earn a fixed return on your cryptocurrencies in a variety of ways. These include:
- Yield farming
- Liquidity reduction
- Staking cryptocurrency
- Lend cryptocurrency
Unfortunately, the information on the Internet is not as simple and clear as one would like and, as a rule, there is no Islamic analysis on the question being discussed.
For people who don't care Sharia-Compliance, points (1) to (4) are largely the same, apart from the different risk dynamics for each return strategy. For them, every strategy brings a fixed return.
A note on definitions
Unfortunately, this means that other online analyzes lump things together or fail to address the level of granularity a Muslim needs to make a decision about whether an investment is haram or halal.
This therefore means that Muslims should be aware of the fact that there are no confirmed and fixed definitions of all these terms and even the biggest crypto players can use them rather loosely.
So what is Halal for a Muslim?
Let’s put aside the terms “yield farming,” “liquidity mining,” “staking,” and “lending” and just look at how you get compensated as an investor:
1. Make money as a broker
You receive compensation for providing liquidity to an Automated Market Maker (“AMM”) such as Uniswap or Pancake. These are automated brokers (think AJ Bell or Hargreaves Lansdown, but for crypto and fully automated, so the crypto protocol itself does the brokering work without the need for human brokers).
2. Get money for participating in a PoS project
You are compensated because you are part of the Proof of Stake (“PoS”) crypto project, and basically, just by staking that coin, you can be involved in mining new coins – and that's how you earn (as you get a portion of it) . the newly minted coin for example).
3. Get money to borrow your coins at interest
You get compensated when you lend your coins to a broker or exchange (like Binance), which then uses those coins to lend them to others and earn an interest rate – and then transfers some of that interest back to you.
Yield farming is typically associated with either (1) or (3).
Liquidity mining usually means (1), but can also mean (2).
Crypto staking usually means (1) or (2).
Crypto lending usually means (3).
As discussed in our stakes article and our top 50 crypto analysis for Uniswap, we believe that (1) and (2) are generally permissible, while (3) is generally disallowed.
The reason for the “general” is that each crypto project can vary in its mechanics and crypto is a rapidly changing landscape, so it's not really possible to give a definitive answer at this point.
What is Halal on Binance?
Now we have clarified what is generally Halal. Now let’s apply this to Binance.
The following options can be found in the Finance section on Binance:
- Mark out
- savings
- Liquid Swap
- Swimming pool
- Double investment
- BNB vault
- 0
- Crypto loans
There are also Pay and Card options, but we won't cover those here as they are not ways to make money on Binance.
| Earning opportunities | Sharia analysis |
| Mark out | This is generally allowed – but also depends on the underlying crypto project you are involved in.
Note that Binance calls this the “annual interest rate.” That doesn't necessarily mean it is Riba according to Islamic law. We think of it as profit sharing on brokerage fees. There is also a section called “DeFi Staking”. I would avoid this as you typically invest in underlying credit based protocols like Venus and others. If you lock your coins for longer, you will achieve a better return – this is also permissible in our opinion – since you will not receive more interest, you will receive a higher share of the profit share in our analysis. The idea is that this is cheaper than going through the central Binance exchange. But in order to make this “exchange on the stock exchange” possible, liquidity is needed. And that's why you get rewarded for providing that liquidity to a particular cryptocurrency pair. Therefore, a similar analysis to staking applies here, as you enable a brokerage-style offering and receive a share of the profits. I would like to point out that I have not gone through this section in detail, but it seems broadly permissible. We haven't looked into it in detail and therefore can't say anything about it Sharia Observance. Personally, I stayed away for now. Unfortunately, this also includes the storage and launchpad function. Savings are prohibited as described above, while Launchpad may involve introducing illegitimate crypto projects that may inadvertently stop you earning any income. So something to avoid. What did I buy?Ultimately I decided to set CAKE (Pancake) for a period of 30 days. This is not investment advice, as you all know – and your capital is at risk – but let me give you my thoughts as they may be helpful in shaping your approach to investing. Firstly, I only have about 15% of my total crypto portfolio invested in this investment strategy and would like to understand the mechanics behind it and how things pan out. Secondly, I chose CAKE and staking rather than the much more aggressive returns seen on some liquid swap currency pairs. The idea here is that you ultimately don't want to make any return-producing investments without also having a good sense of the underlying crypto project you're investing in – because that will be your capital gain or loss. I know CAKE is a little more aggressive than just betting on Bitcoin or Ethereum, but it is now the largest AMM on the Binance track, so in that sense I see it as a promising long-term investment following the overall growth of should crypto in general. And I'm long-term bullish on cryptocurrencies and generally happy to take some risk. An additional handy note: you must first purchase CAKE (or whatever crypto project you choose) before you can stake it. ConclusionsWe plan to cover more topics in this emerging and complex world of crypto as we delve deeper into it. If you're more interested in keeping track of your investments, including crypto, be sure to also check out our platform for tracking and comparing your assets. As always, please note that these articles are not fatawa and, although we are educated on Islamic financial topics, we are not muftis or senior scholars. That's why we always make sure to show you our reasoning and way of thinking so that you can understand it clearly and then form your own opinion. resources
Ibrahim is a published author and specialist in Islamic finance and investments. He is currently the CEO of Islamicfinanceguru and its sister investment company Cur8 Capital. He holds a BA in Philosophy, Politics and Economics from the University of Oxford, an Alimiyyah degree from Al Salam Institute and an MA in Islamic Finance. Before founding Islamic Finance Guru, Ibrahim was a corporate lawyer. He trained at Ashurst LLP and then specialized in private equity and venture capital funds at Debevoise & Plimpton LLP. He holds a diploma in investment advisory and financial planning as well as a certificate in investment management. Publication: Halal Investing for Beginners: How to Start, Grow and Scale Your Halal Investing Portfolio (Wiley) Read more |
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