Are you afraid of DeFi? Here’s how you can earn a 41% return on Bitcoin without „wrapping it up

The returns of decentralized finance are incredibly attractive, but option markets can also offer similar returns for those willing to take risks.

The number of investors interested in yield farming grew tremendously in the last 6 months as decentralized finance (DeFi) applications became more popular and easier to use.

This has led us to see a countless number of liquidity pools that offer an annual percentage yield (APY) in excess of 1,000% and how the total value locked in DeFi contracts increased to billions of dollars.

Bitcoin investors who wanted a piece of this huge pie were able to participate in DeFi’s yield farming by converting their BTC into tokenized versions such as Wrapped BTC (WBTC) and RenBTC (RENBTC).

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This allows BTC holders to interact with all ERC-20-based tokens, but some analysts question how decentralized the custody of Bitcoin is behind these offerings; therefore, it makes sense to explore more centralized solutions.

Although it’s impossible to directly achieve the performance of Bitcoin deposits (BTC) on these DeFi platforms, investors can still benefit from centralized services. While it’s unlikely to find APYs above 12%, there are at least more secure ways to get a return with Bitcoin „uninvested.

Centralized services such as Bitfinex, Poloniex, BlockFi, and Nexo will typically yield between 5% and 10% annually for BTC and stablecoins deposits. To increase the payout, it’s necessary to look for more risk, which doesn’t necessarily mean a less well-known exchange or intermediary.

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By trading BTC options on the Chicago Mercantile Exchange (CME), Deribit or OKEx, an investor can comfortably achieve returns of 40% or more.
The hedged call strategy has its risks

The buyer of a call option can purchase Bitcoin at a fixed price at a set future date. For that privilege, this buyer pays in advance to the seller of that call. Although the buyer can usually use this instrument as insurance, sellers primarily earn a fixed income from option trading.

Each contract has a predetermined expiration date and strike price, so potential gains and losses can be calculated in advance. This call hedging strategy consists of simultaneously holding BTC and selling the equivalent size in call options.

Should Bitcoin traders be concerned about the minimums reached after USD 12,000?

No. It would be unfair to call it „fixed income trading,“ because potential losses are incurred whenever there’s a more substantial price drop at the expiration of the options. However, you can adjust that risk while setting up the trade. It is worth noting that limiting exposure will result in lower returns.

Expected returns for a November $9.5K covered call

Expected returns for a covered call of USD 9,5000 from November.

The above graph represents a covered call strategy for the next November maturity, with a 6% return in two months, equivalent to an APY of 41%. As mentioned above, the hedged call strategy can be loss-making if the BTC price at maturity is lower than the strategy’s threshold level.

Although the 6% return is achieved by selling call options from 0.5 BTC to USD 9,000 and 0.5 BTC to 10,000, the strategy requires that BTC be held above USD 10,000 at the November 27 expiration to achieve that profit margin. Any level below USD 8,960 will result in a loss, but that’s 16.6% below the current Bitcoin price of USD 10,750.

By selling these call options, investors will get 0.1665 BTC (USD 1,957 at today’s price); therefore, the covered call investor must purchase the remaining 0.8335 BTC (USD 9,793) through the regular futures spot markets. However, if the buyer is not willing to take this risk, it is possible to lower the loss threshold.