Cryptocurrencies differ from traditional assets in many ways and applying some valuing approaches to cryptocurrencies causes challenges. Cryptocurrencies are not only currencies because their technological basis is capable of doing more than exchange. Also, they may be hardly called commodities because they aren’t consumable.
Unlike stocks that represent companies with cash flow, cryptocurrencies and blockchain networks that generate them are not companies. Some traditional financial elements don’t work with certain cryptocurrencies and people are arguing whether cryptocurrencies can generate cash flow in the usual sense.
Cryptocurrencies are a kind of separate type of assets that go beyond the usual understanding of many concepts and can even change them. For example, if you look at bitcoin, at first glance it seems that it doesn’t generate cash flows the same as gold and fiat currencies. However, bitcoin hard forks can act as a cash flow in the technical financial sense. This is unlikely to be the cash flow you would expect when investing in cryptocurrency, but still.
One way or another, cryptocurrencies are a good basis for creating innovative instruments to generate cash flows, and here are some of them.
Crypto lending for leverage trading
On some exchanges, users can lend crypto to margin traders and receive a reward for it. Cash flow is formed due to the opening and rollover fees, which are paid by margin traders to borrow cryptocurrencies. Cash flow can vary depending on the cryptocurrency and how the opening and rollover fees are shared between exchange and lender.
For better understanding, margin trading involves the use of leverage. It allows traders to increase the available amount for trading by borrowing a certain number of assets. For instance, 2x leverage means that instead of trading 1 BTC it is possible to trade 2 BTC — without owning the second one.
Crypto lending is a low-risk opportunity to generate stable crypto cash flow. But return can be relatively low for the crypto industry. A lot depends on the platform which is used for lending. The biggest risk of loss in the event that the exchange goes completely bankrupt. Also, crypto lending may not be available to some users due to certain restrictions and requirements for the lender to ensure liquidity.
Nevertheless, cryptocurrency makes it possible to become your own bank not only in the context of money management but also in providing services like crypto loans. Besides, you can automate the process of receiving cash flow using smart contracts.
Yield farming means generating income from crypto lending and borrowing on DeFi platforms. This is one of the most riskiest ways to generate cash flow in the crypto market, but at the same time it is one of the most profitable. Recently, yield farming has become extremely popular and has driven the entire DeFi sector.
At some point, borrowing became even more valuable than lending and it caused a sharp increase in interest in yield farming. For example, COMP tokens covered borrowing costs in cryptocurrencies for a time being and looked like crypto cashback that encouraged users to keep using the platform. Compound users receive COMP tokens for lending and borrowing on the platform. COMP tokens can be used to influence the future development of the project. It is almost the same as if the bank gave you its shares in addition to the loan.
But you should remember that if you borrow too much when yield farming, you can lose your collateral. DeFi tokens are also too volatile and there are many scam projects — all that makes cash flow unstable.
Staking and Proof-of-Stake are crypto-native concepts that have become one of the main things in the crypto industry. The idea is that people can lock up their coins to validate transactions for a network. Stakers receive a reward for that in the form of new coins and transactions fees.
The principle of receiving cash flow is quite similar to a bank deposit. You can stake coins in your wallet or use your balance on crypto exchange for staking. For instance, you can buy Tezos (XTZ) on the crypto exchange, hold it on your balance, and receive a monthly reward. The main risk for investors when staking is a coin’s price significant drop which can make income less than expected or negligible.
In turn, you can get governance tokens while staking some coins. When staking ZIL, users can also receive gZIL that is used for voting and making decisions on further Zilliqa ecosystem development. As in the COMP case, receiving a reward is not limited to just a monetary reward but also gives users the opportunity to influence the project.
The bottom line
These are just a few instruments that allow you to generate cash flow in the crypto market but they identify one important idea. Cryptocurrencies provide more opportunities to influence the source of cash flow. Receiving native tokens increases the user’s involvement and makes him interested in the project’s success and development, as this may increase his potential cash flow. This changes the understanding of some ways to generate cash flow, transforming them from passive income sources to more active ones.
At the same time, some traditionally active sources can become more passive thanks to automation using smart contracts. In a sense, cryptocurrencies are already changing our understanding of cash flow. Deeper changes can await us with the more massive adoption of cryptocurrencies and blockchain.