Traders are garnering juicy returns by lending out cryptocurrencies as the fast-growing field of decentralised finance throws up new but highly risky opportunities to make money.
The number of consumer-oriented platforms offering yields on crypto balances has grown rapidly, with annual interest rates ranging about 7 to 12 per cent for various coins such as bitcoin and “stablecoins” including tether.
Traders can chase even higher rates through “yield farming”, the practice of scouring the world of decentralised finance — or DeFi — for the best yields available from more obscure projects and coins. These shortlived opportunities can advertise interest rates as high as several thousand per cent to pull in digital cash.
The popularity of complex yield-generating strategies highlights concerns over whether crypto customers fully understand the risks they are assuming, experts say. Recent research by the UK’s Financial Conduct Authority found that public understanding of crypto has fallen as digital assets have become more popular over the past year.
“The risk for some retail investors is that they see the ridiculously high interest rates but they don’t really understand what is going on behind the scenes,” said Fabian Schär, a professor at the University of Basel who studies decentralised finance.
Yield platforms, which often advertised their products as “savings wallets” or “interest accounts”, can appear to be a safe alternative to trying to play the market for cryptocurrencies. The mainstay for many platforms is lending out their customers’ digital cash at higher rates than they offer to clients,