Where to invest your cryptocurrencies to generate income?

Anyone who invests in cryptocurrencies sooner or later comes to the same doubt: where to keep my cryptoassets earning without falling for scams?

There are now several legitimate ways to generate income with crypto, from centralized platforms to DeFi protocols. Each involves different levels of risk, custody and complexity.

In this guide, you will understand what are the best places to invest your crypto-assets, how each model works and for whom every option makes sense.

Table of contents:

• Considerations before investing
• Centralized platforms
  • Kraken Earn: simple income for beginners
  • Bitfinex Funding: lending to traders
• P2P platforms
  • HodlHodl Lending: loans with Bitcoin collateral
  • Aave Lending: loans via smart contracts
  • Uniswap LPdecentralized liquidity supply
• Conclusion

Before investing

First of all, it's important to make something clear: there is no return without risk. All the alternatives are subject to losses, but in different ways.

So, before looking for a return, it's worth taking the time to analyze the platform you've chosen and assess whether it doesn't make more sense to keep cryptocurrencies in self-custody, simply waiting for a possible increase in value.

Always be aware of the risks involved:

• Custody of funds,
• Technical faults,
• Counterparty (borrower),
• Market volatility.

That said, let's take a look at the best options available today.

Centralized platforms

Kraken Earn: simple income for beginners

Kraken is one of the oldest exchanges on the market and offers the Kraken Earn, A predictable income for your cryptocurrencies and stablecoins.

Simply activate the options available in the “Earn” tab to start receiving up to 4.25% per year in dollars, USDT, USDC or USDG. For more volatile cryptocurrencies, yields tend to vary more. At the time of writing, Kraken pays around 0.02% per year for BTC, with the bonus distributed in the Babylon (BABY) cryptocurrency.

It is also possible to opt for “Bonded Earn”, a method which requires assets to be locked up for a certain period, offering a higher annual return. On the other hand, the investor loses liquidity during the lock-up period and assumes a higher opportunity cost.

How it works:

• you need a verified Kraken account;
• you deposit your cryptoassets with Kraken;
• activates the Earn product;
• the broker uses these assets for staking or loans;
• you receive periodic interest.

Advantages:

• easy to use;
• good historical reputation;
• coins available for withdrawal at any time in Auto Earn.

Disadvantages:

• broker's custody;
• Kraken can change the rules;
• regulatory risk;
• need for KYC.

If you have any questions or are looking for up-to-date information, please contact Kraken Earn support page.

Bitfinex Funding: lending to traders

Bitfinex is also one of the oldest exchanges on the market, having been founded in mid-2012, just like Kraken. There, you can earn income on various cryptocurrencies by lending them to other traders and charging interest in the “Funding”.

There is a book of offers between borrowers and lenders, which means that the annual return varies greatly over time. At the time of writing, the estimated annual return is 13.76% to USDT and 0.0078% for BTC.

It's not a fixed rule, but the returns on Funding are usually increase when traders expect a drop in the asset's price e decrease when expectations are high. This is because the main reason for borrowing on a specific asset is to sell it on the market and try to buy it back cheaper later.

To start generating income, you need to have a balance in the wallet called “Funding” within Bitfinex. Normally, assets are initially stored in the wallet “Exchange”, It is necessary to carry out a internal transfer from the tab “Wallets”.

Then go to the “Funding” and select the desired asset under “Tickers”. Just below, in the “Funding form”, define:

• the expected daily interest rate in “Rate”;
• the amount to be lent in “Amount” (you can select the entire available balance using the red button);
• the maximum term of the loan in “Period”, after which the funds are returned to you with interest.

Tip: use the option “FRR” to automatically adjust the interest to the current market average and activate the “Auto-renew” if you want to keep your assets on loan continuously, without having to manually renew each operation.

How it works:

• you need a verified Bitfinex account;
• you lend cryptoassets or stablecoins;
• traders use these funds for leveraged trading;
• you receive interest on the loan.

Advantages:

• variable and transparent income;
• generally offers a good return on the dollar in a rising market and a good return on crypto in a falling market;
• long operating history.

Disadvantages:

• exchange custody;
• loan risk;
• need for KYC.

For questions or up-to-date information, see the Bitfinex blog.

P2P platforms

HodlHodl Lending: loans with Bitcoin collateral

HodlHodl Lending uses a model peer-to-peer, in which the loan guarantee is under shared custody in a 2-of-3 multisig. In practice, this means that neither party has unilateral control over the funds.

The platform only acts as a mediator if a dispute is opened. Apart from these situations, the lender and borrower settle all the stages of the contract between themselves, from the loan to the return of the funds.

Logging into your HodlHodl account, click on “Lending” to enter the lending platform. Then select “To Lend” to check available offers from borrowers.

If none of the available offers match what you are looking for - be it in terms of the amount to be lent, term, interest rate or LTV - you can create your own offer with the desired parameters and wait for a borrower to accept it.

How it works:

• you create an account at HodlHodl
• you lend directly to someone else;
• the loan is collateralized in BTC;
• contracts use multisig.

Advantages:

• without KYC;
• lower counterparty risk;
• contract parameters freely chosen by the parties.

Disadvantages:

• lower liquidity;
• a more manual process;
• few currency options;
• risk of liquidating the contract in the event of an abrupt fall in the price of bitcoin.

If you want to understand in more detail, read the HodlHodl Lending FAQ.

Aave Lending: loans via smart contracts

A Aave is one of the main DeFi protocols on the market. In it, operations take place through smart contracts, which connect participants directly, without traditional intermediaries.

Although the technology behind it is different, the general operation is similar to the previous alternative, loans collateralized in cryptocurrencies.

One of the great advantages of Aave is the possibility of interact directly with the protocol, without relying on a website interface. However, this method requires more advanced technical knowledge. That's why in this article we're going to focus on simplest form, using the Aave Labs' official platform.

When you access the platform, connect your wallet, such as Cake Wallet, MetaMask, Coinbase Wallet or another compatible one. You will then see the list of available assets in the table “Assets to Supply”, which shows which cryptocurrencies can be offered for loan. In the “APY”, You can see the estimated annual return from leaving these assets available.

At the time of writing, the approximate APY was 2.43% to USDT, 3.18% to USDC, 1.28% for ETH, while WBTC had a yield of less than 0.01% per year.

How it works:

• you connect your wallet to the Aave protocol
• you deposit your cryptocurrencies;
• other users deposit collateral and take out loans;
• interest is paid automatically.

Advantages:

• without KYC;
• lower counterparty risk;
• on-chain transparency;
• high liquidity.

Disadvantages:

• risk of failure in smart contracts;
• DeFi's systemic risk;
• need for technical knowledge.

To find out more about the subject, take a look at Aave FAQ.

Uniswap LP: decentralized liquidity supply

A Uniswap is one of the main protocols DeFi of the market and works as a decentralized exchange (DEX) based on automatic market makers (AMMs).

Unlike the lending options presented above, here the income comes from the providing liquidity, not loans or staking.

In practice, you deposit two assets in one liquidity pool (e.g. ETH/USDC). These funds are available for other users to exchange within Uniswap. By exchanging one asset for another, you get a share of the fees paid by traders, in proportion to their participation in the pool.

As with Aave, all operations take place through smart contracts, without intermediaries. Control of the funds always remains with the user.

To get started, go to Uniswap's official platform and connect your compatible wallet, such as MetaMask, Coinbase Wallet or another Web3 wallet. Then go to the “Pools” and select “New Position” to create a new liquidity position.

You must choose:

• o asset pair you wish to provide;
• a price range in which your liquidity will be active (in the case of Uniswap v3);
• o amount to be deposited of each asset.

After confirming the operation, its liquidity is automatically used in the exchanges carried out within the pool, and the cumulative rates can be redeemed at any time.

It is important to understand that income are not fixed. They vary:

• the trading volume of the pair;
• the volatility of the assets involved.

How it works:

• you connect your wallet to Uniswap;
• deposits two assets in a liquidity pool;
• traders use this pool to make trades;
• you receive part of the fees generated.

Advantages:

• decentralized;
• without KYC;
• potential for good returns on pairs with high volume.

Disadvantages and risks:

• risk of impermanent loss;
• simultaneous exposure to two volatile assets;
• unpredictable income;
• greater complexity.

In general, liquidity supply at Uniswap is best suited to those who already understands the risks of DeFi and has the stomach for volatility.

For more technical details, see official Uniswap documentation.

So where is the best place to invest your cryptocurrencies?

The short answer is: there is no single best place.

Everything will depend on the risks you are willing to take, whether you need to redeem the money in the short or long term, among other factors.

A common strategy involves dividing your currencies into:

• mostly in self-custody with no income;
• a part in more conservative lending;
• a small part in DeFi with a possible higher return.

Generating income with cryptoassets is not always about seeking the highest yield, but about understanding the relationship between return and risk.

Warning: This content is educational and does not constitute investment advice.

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