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The Dual Nature of Bitcoin Volatility

One of Bitcoin’s most attractive features is its volatility, which also poses a significant challenge. Managing this volatility is crucial, and native Bitcoin yields offer a solution. These yields enable investors to build their portfolios while shielding them from severe market fluctuations.

While volatility is sometimes viewed negatively, it is an inherent aspect of decentralized and permissionless crypto markets. Bitcoin’s high volatility is linked to high returns. However, frequent fluctuations in both directions can make this volatility less appealing.

Institutional Concerns and Market Trends

Volatility has been identified as a critical barrier preventing institutional investors from allocating to Bitcoin. A survey revealed that large price swings make Bitcoin a riskier asset due to its unpredictable nature.

Currently, we are in a period marked by broader bull and bear trends, making volatility hard to bear. However, as Bitcoin matures, its volatility is decreasing each cycle. The approval of spot Bitcoin exchange-traded funds has reduced the asset’s volatility to 40% in 2024, compared to 106% in 2021. Although it’s too early to say if this lower volatility will persist, it indicates that we might not see high percentage gains moving forward.

The Importance of Bitcoin Yields

In a highly volatile market like crypto, Bitcoin yield offers the opportunity to earn consistent and stable returns, mitigating some price volatility. This steady stream of passive income can be earned without selling BTC, allowing holders to put their idle assets to good use.

Yield-generating opportunities promote broader acceptance and use of Bitcoin, especially among institutional investors seeking yield strategies. Even short-term holders might be inclined to hold their BTC longer if they can increase their investment over time, benefiting from both price increases and a constant income supply. This can reduce market selling pressure and enhance the asset’s price performance as demand for yield-generating assets grows.

Sources of Bitcoin Yield

The growth of decentralized finance (DeFi) on Bitcoin has introduced various sources of Bitcoin yields. Bitcoin layer-2 solutions enable BTC holders to enjoy staking rewards, determined by market dynamics. Protocols like Babylon allow BTC holders to stake their Bitcoin on proof-of-stake (PoS) chains without relinquishing custody of their assets.

Platforms like pSTAKE Finance offer Bitcoin liquid staking, collaborating with Babylon to provide boosted yields. Initially, the primary source of liquid staking yields is generated through economic security, but eventually, multiple avenues for yield will be introduced to offer diverse earning opportunities.

These solutions not only enable BTC holders to earn yields but also provide Bitcoin miners with an additional revenue source. Bitcoin’s long-standing resilience and trillion-dollar security can be leveraged to secure other chains.

Broader Implications of Bitcoin Yields

In the future, Bitcoin yields, determined by the market, may set the base rate of return for crypto markets, akin to how US T-bills set a base rate for financial markets. This could have far-reaching implications beyond Bitcoin holders and the ecosystem.

Investments in enabling native yield generation on Bitcoin could lead to a resurgence of DeFi, which suffered significantly during the 2022 bear market. Bitcoin’s decentralized, battle-tested, and censorship-resistant peer-to-peer network can lay the foundation for a robust DeFi sector. Given Bitcoin’s capped supply and its status as the most accessible and universal asset class, these innovations could lead to the truest version of DeFi.

We are at the beginning of an exciting journey. For this vision to become a reality, continued development and innovation are essential to build a better future for our financial and economic systems.

Explore more news on Global Crypto News.

Mikhil Pandey is the co-founder and chief strategy officer of Persistence. Founded in 2019, Persistence is a purpose-built layer-1 on a mission to maximize yield and security through liquid staking and restaking, building at the forefront of the proof-of-stake landscape. Persistence Labs has multiple products in its ecosystem, including pSTAKE Finance, Dexter, and more.

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