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Cryptocurrency use cases: DeFi income for hardworking Dads
Fathers day is always an ideal opportunity for us to consider the hardworking dads among us: those putting their noses to the grindstone every day to bring home the bacon for the family, or perhaps working hard to fry said bacon to perfection in the kitchen.
While it is often mom that finds herself looking after the savings - statistically speaking, at least - it’s often dads that are expected to be smart with the long-term investments, particularly those that might be intended for the kids’ college fees, first car, or home purchase.
For longer-term investments, investors can typically take a little more risk. While stock markets have been notoriously volatile in recent years, if total growth is taken over a longer-term view, this volatility tends to even out.
The US’s S&P 500 index of the country’s biggest companies, for example, has returned 240% over the past 15 years (June 14, 2006 - June 15, 2021, Google Finance), and that includes two of the worst financial crises in history. Meanwhile, China’s Hang Seng Index has returned 81% and the UK’s FTSE All Share Index 43% over the same timeframe.
Investing and volatility
Longer-term investments made into riskier areas tend to be where dad may build a portfolio, though of course, this is never easy. If there is a hard deadline for when that money is needed - like a child’s first year of college, for example - providing for that with investments always carries the risk that the market will be in the wrong place at the wrong time.
During the financial crisis of 2008-2009, for example, global stock markets lost around 50% of their value in less than a year. Meanwhile, in the highly volatile area of cryptocurrency, the market has witnessed some wild periods since Bitcoin - the first cryptocurrency - was founded in 2009.
Overall, Bitcoin has outstripped almost every other asset in terms of total growth, rising from quite literally $0 to $40,000 per coin in just 12 years. Even since 2013 when it began trading at around $135 per coin, those that invested $1,000 would be sitting on $295,000 today, just eight years later.
During this time, however, Bitcoin has lost up to 80% of its value in a single year (2018), while recently it lost as much as 30% in a single day. Meanwhile, other sectors of the cryptocurrency market have seen even wilder swings - with numerous coins and tokens meeting a similar fate to the many small businesses that did not make it through the global financial crisis of 2008/09.
A new passive income opportunity
The inherent volatility involved in all forms of investment is why it is essential for any investor in any market to have a good cash buffer in place. This is especially the case for hard-working dads who need to make sure that, should any big emergencies arise, they have something to lean on while their portfolio recovers from the latest market downturn.
In addition to this safety net, the advent of decentralized finance, or DeFi as it’s known to its friends, has presented another, complimentary opportunity. Through the use of stablecoins whose value is pegged to that of a stable, “real world” currency, DeFi allows users to earn passive income on digital assets that don’t have the same volatility as Bitcoin and its peers.
By swapping euros, pounds, dollars, or any other number of other fiat currencies (as they are technically known) into USD Tether coin, for example, a user can earn an annual percentage yield (APY) in excess of 10% with a DeFi wealth management platform, and often much more.
This is a unique opportunity not available anywhere else as, in traditional finance, interest rates on fiat money are now firmly a thing of the past (for Western economies at least) while even regulated financial markets are inherently volatile and so carry the risk of being in a down-swing when you need the money.
Higher APYs on stablecoins
Earning passive income on stablecoins held with a DeFi platform, however, allows dad to sit back, relax and perhaps even have a little fun for himself with his (well-diversified) portfolio. With compounding typically occurring daily in DeFi, this can have a powerful impact over the long term for those saving regular amounts every month.
An APY of 12% on a stable digital asset like USDT or USDC, for example, would mean that those saving $250 per month over five years would end that period with a pot of $20,905 – $5,655 of which would be accrued interest. Over ten years the total would be $58,537, with interest accounting for $28,287, or nearly half of the total return.
This is certainly a handsome sum for any dad to give to their child to buy a car, put a deposit on a first home or help them through college. Moreover, it can be achieved entirely passively without the need to trade, consistently monitor a portfolio or worry about market volatility.
Of course, cryptocurrency cannot be compared to saving cash: this remains an unregulated market and, unlike with banks in most developed markets, deposits are not protected by nationwide, government-backed schemes. Rather, levels of deposit protection will depend on individual DeFi providers, while users can also purchase individual insurance.
As a complement to a broad, diversified portfolio that includes a strong cash buffer, though, DeFi could be a winning side strategy for dad.