Yield Farming vs. HODLing: Which is Better for You?
The blockchain and cryptocurrency realm has forever changed the modern financial system as we knew it. Digital assets present individuals and institutions with a new way to engage in transactions in a permissionless, borderless fashion for minuscule costs, presenting a viable alternative to traditional banks and asset-transfer services.
But over the years, crypto has evolved to a new level through DeFi (Decentralized Finance), dramatically expanding the utility and potential of digital assets. Crypto investors with a long-term mindset often HODL (Hold On for Dear Life) with their tokens, which is a play on the word “hold” denoting they would store them in their wallets and never sell with the expectation of price appreciation in the long run.
While this has certainly proven to be an effective strategy to grow your investment over time (given the crypto market’s long-term performance), investors have been searching for more than just this simple method, which has some drawbacks. That’s where DeFi gave birth to the concept of yield farming, a new and lucrative way to earn passive income in crypto.
HODLing has become an accepted and powerful battle cry in the entire crypto market, with people ranging from popular influencers to your average investor disseminating this term throughout the online crypto-verse. The motto of this term is to encourage investors to never sell their tokens, maintaining the full balance within their wallets and riding out the bull and bear markets to infinity and beyond.
As previously mentioned, this has actually worked out to be a great strategy if you’ve been holding cryptocurrencies for a period of several years. Ever since Bitcoin’s inception in 2009, new and exciting tokens have emerged and performed extremely well from their starting prices, in the thousands to sometimes millions of percent gains. It’s interesting to note that since Bitcoin started, there have been around 3971 profitable days in its history, meaning there’s around a 95% chance buying Bitcoin would be profitable, regardless of when you purchased it.
Those who’ve been able to weather the volatile storms and hold onto their tokens have undoubtedly reaped the benefits, without having the hassle and stress of day-trading or constantly watching their portfolios day in and day out.
Yield farming is the newest and hottest trend in the DeFi market when it comes to earning high yields and passive income. So what exactly is it and how does it work?
Yield farming is an investment strategy where investors can assume different degrees of risk and exposure to maximize their gains and ROI (return on investment) - it’s essentially actively managing passive income. Investors can maximize their earnings through using leverage and increasing their access to capital, transferring their funds across different DeFi protocols, and participating in liquidity provision and liquidity mining activities to earn rewards.
This practice has helped push the DeFi industry to the next level of adoption, drawing in flocks of new users to these protocols aiming to deposit their tokens with high expectations of earning generous rates of return.
These days, most DEXs (decentralized exchanges) and protocols run on the Ethereum blockchain, so the majority of farming opportunities exist for ERC-20 tokens - however, other blockchains have put protocols and mechanisms in place to offer these opportunities to investors as well. Many investors have also turned to farming stablecoins, such as USDC and USDT (Tether), which have become an extremely preferable and common practice in the yield-farming industry today. This is because they eliminate price volatility and act almost similar to a high APY (Annual Percentage Yield) savings account.
If you’re more risk-averse and don’t want to own volatile crypto assets, then stablecoin farming may just be the path for you.
What’s the Best Choice for You?
While DeFi is an extremely promising industry, it certainly poses inherent risks. Currently, there are only a select few trustworthy platforms with high security and/or insurance options, so the threat of cyberattacks is still very real if you’re not careful.
For those who like keeping things simple and sticking with safe storage options, such as insured platforms or offline “cold storage” hardware wallets, HODLing your tokens may be the optimal choice. But it’s important to remember HODLing only entitles you to the gains (or losses) or your current portfolio value. Ultimately, the real inherent risk is holding your tokens on a CEX (centralized exchange) where there’s regulatory risk, not to mention they can freeze your funds at their discretion.
A strategy to help mitigate this risk is to diversify your holdings across multiple platforms and protocols, including hardware wallets, concentrating a majority of your wealth in more trustworthy entities.
If you’re thirsty for more, then we encourage you to explore the prospects of yield-farming. This method allows you to put your money to work, exposing your portfolio to some of the highest yields and returns ever witnessed in history. Users can completely separate themselves from the traditional banking system, taking matters into their own hands and beating inflation by a mile.
That way, you maintain exposure to the crypto you want to HODL in addition to earning a continuous flow of passive income. Regardless of whether your investments increase or decrease, you’ll still be able to pocket additional funds in the form of interest to increase your portfolio.
In the end, no matter which option you choose, you’re still exposing yourself to the ever-growing and blossoming cryptocurrency market. It’s an exciting space with the newest and most innovative technological developments in terms of finance and money.
Coinchange Makes it Easy to Choose
With Coinchange, we make it easy to choose between being a HODLer or yield-farmer. Our solution is that you don’t have to choose - you can simply have both, right in your back pocket.
Transfer your tokens into your Coinchange wallet with ease or simply buy them through our interface to get started. From there, your coins will be sitting on our platform where they’re protected by some of the highest and most robust security in the industry today.
Once you’re in the High Yield Account there, you’ll immediately start earning some of the highest yields the market has to offer, as we compare rates across the top DeFi protocols. With Coinchange, you’ll have instant access to simultaneous HODLing and yield-farming opportunities, meaning you can hold onto your coins while still earning passive income in the background - and it can all be done in just one click