Even the bullish rally of Bitcoin last year has caused some of the biggest skeptics to soften their position. From economists to hedge fund managers, the world is opening up to technology, and at the heart of this movement is Decentralized Finance, or DeFi. While the market value of all cryptocurrencies has reached $ 2 trillion, the equivalent of Apple’s value, the promise of DeFi – a small corner of today’s blockchain industry – is catching the attention of institutional investors.
As the bullish trend in Bitcoin (BTC) continues, interest-bearing cryptocurrencies are becoming more and more popular. Some services provide up to 8% return on bitcoin holdings. For investors who are already expecting an increase in value, this can be incredibly helpful in 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 interest rates close to zero for the foreseeable future, investors are planning to move funds to alternative locations to protect themselves.
The 2% inflation target set by the US Federal Reserve has raised concerns among investors who fear devaluation, and amid the uncertainty in tensions between the US and China, dollar-denominated portfolios are now more risky.
Getting, storing, and using cryptocurrency securely is still very difficult – much more difficult than creating a bank account. Nevertheless, according to Larry Fink, CEO of BlackRock – a global investment management fund with nearly $ 9 trillion in assets – Bitcoin could become an asset in the global market and reach new heights in the coming years.
In a traditional financial system, money markets are the parts of the economy that issue short-term money. They usually process loans for a year or less and provide services such as loans, borrowings, buying and selling, while the wholesale is done without a prescription. Money markets consist of short-term and highly liquid assets that are part of the broader financial market system.
The money markets are traditionally very complex, with high costs and hidden fees forcing most investors to hire a fund manager. However, its existence is crucial to the functioning of modern financial economics. They encourage people to lend money in the short term and direct capital for productive use. This improves the overall market efficiency and helps financial institutions achieve their goals. Basically, anyone with extra cash can earn interest on deposits.
Money markets consist of various types of securities such as short-term treasury bonds, certificates of deposit, repurchase agreements, and funds. These funds usually consist of shares of $ 1.
On the other hand, capital markets are dedicated to trading long-term debt and equity instruments and refer to the entire stock and bond market. With a computer, anyone can buy or sell assets in seconds, but equity firms do so to raise money for long-term operations. These stocks fluctuate and, unlike money market products, they do not have an expiration date.
Since money market investments are virtually risk free, they often come at low interest rates. This means that they will not generate large returns or large gains compared to risky assets such as stocks and bonds.
DeFi against the whole world?
To hedge currency risk, institutions have begun to use Bitcoin, and retail investors have followed suit. More than 60% of Bitcoin’s traded supply has not moved since 2018 and BTC is expected to exceed $ 100,000 over the next 24 months.
If the current trend continues, then investors will continue to hold Bitcoin. However, while much of the world’s first cryptocurrency supply is still in storage, the DeFi industry is constantly working to create alternative platforms for interest payments through smart contracts, increasing transparency by allowing investors to see and track funds online.
Also, the average return on DeFi products is much higher than in traditional money markets, with some platforms even offering double-digit annual interest rates on deposits. From asset management to smart contract renegotiation, the DeFi Chamber creates a decentralized infrastructure for scalable money markets.