Bitcoin’s bull rally since last year has caused some of the biggest skeptics to soften. From economists to hedge fund managers, the world is opening up to technology, and decentralized financing, or DeFi, is at the heart of this movement. While the market value of all cryptocurrencies has reached $ 2 trillion, equivalent to Apple’s value, it is the promise of DeFi – a small corner of today’s blockchain industry – that is catching the attention of institutional investors.
As Bitcoin (BTC) continues to grow, cryptocurrency products become the most profitable. Some services offer up to 8% return on bitcoin holdings. For investors who already expect the value to rise, this can be incredibly useful for maintaining cash flow without selling any assets.
The three main factors driving institutional interest in Bitcoin are historically low current interest rates, inflation and geopolitical instability. With expected interest rates to be close to zero in the foreseeable future, investors are preparing to move their money to alternative places to protect themselves.
2% inflation target set by the US Federal Reserve has scared investors worried about devaluation, and with tensions between the US and China on the verge of danger, dollar portfolios are growing every day. more risky.
Buying, storing and using cryptocurrencies is still a very difficult challenge – much more so than opening a bank account. However, according to Larry Fink, CEO of BlackRock – a global investment management fund with nearly $ 9 trillion in assets under management – Bitcoin could become a global market asset and reach new heights in the coming years.
In the traditional financial system, money markets are part of the economy that issues short-term money. They usually trade in loans for a year or less, and they offer services such as loans and lending, buying and selling, while running a wholesale business without a prescription. Money markets consist of short-term and highly liquid assets that are part of the broader financial market system.
Money markets have traditionally been very complex, with exorbitant fixed costs and hidden fees that most investors pay to hire a fund manager. However, the presence is crucial to the functioning of the modern financial economy. They encourage people to lend in the short term and channel capital for productive use. This improves overall market efficiency by helping financial institutions achieve their goals. Basically, anyone who has money left over can get interest on their deposits.
Money markets consist of different types of securities, such as short-term government bonds, deposit certificates, repurchase agreements and mutual funds, among others. These funds usually consist of $ 1 shares.
On the other hand, the capital markets are designed to trade long-term debt and equity instruments and refer to the entire stock and bond market. Using a computer, anyone can buy or sell assets in seconds, but issuers do this to raise money for long-term transactions. These stocks fluctuate, and unlike money market products, they have no expiration date.
Since money market investments are virtually risk-free, they are often also made with minimal interest rates. This means that it will not generate large profits or significant gains over risky assets such as stocks and bonds.
DeFi versus the world?
Institutions are starting to use bitcoin to hedge currency risk, and retail investors are following suit. More than 60% of the marketable supply of bitcoin has not moved since 2018, and BTC is expected to exceed $ 100,000 over the next 24 months.
If the current trend continues, investors will continue to accumulate BTC. However, while much of the world’s first cryptocurrency supply remains in the vault, the DeFi industry is constantly creating alternative platforms for interest payments through smart contracts, which increases transparency by letting investors see and track money in the chain.
In addition, the average return on DeFi products is much higher than in traditional money markets, with some platforms even offering double-digit annual returns on deposits. From asset management to the confirmation of smart contracts, the DeFi room creates a decentralized infrastructure for scalable money markets.
The effort is higher in emerging markets because the funds are used to raise capital with a higher margin value in return, according to Stani Kulechev, co-founder of the Aave DeFi protocol.