Can We Create a Yield Curve for Bitcoin?

Bitcoin has sometimes been compared to the bond market because of the safety of bitcoin, but does this mean that bitcoin has a yield curve?

Not really, no. Bitcoin does not have a yield curve because there is no yield, par price, or coupon rate. However, this does not mean that a yield curve cannot be created for bitcoin. 

For instance, the average return of the coin can be plotted and then it can be combined with the average yield for bitcoin on a platform like Blockfi. Of course, this is not a yield curve because bitcoin itself does not pay a yield. 

Anyway, this article will cover some of the ways it is possible to create a crude yield curve for bitcoin. 

Average Annual Return of Bitcoin

We can plot out the average annual return of bitcoin, but it’s so unpredictable that it does not offer anything that actually resembles a yield curve. Here are the annual returns of bitcoin for the past few years:

2016: 125%

2017: 1325%

2018: -72%

2019: 88%

2020: 302%

As you can see, the average rate of return is still positive, but the year-to-year is all over the place. For instance, it went from 1325% in 2017 to -72% in 2018.

Any sort of “yield” curve with those data points would not make much sense, so we will have to move onto something a little more predictable. 

Bitcoin Returns on BlockFi

BlockFi is a lending platform that allows users to earn interest on their bitcoin by depositing it on the platform. BlockFi then loans it out and provides the depositor with some interest in exchange for taking on the risk. 

This is a little more consistent than simply looking at the average annual return of bitcoin. 

At the time of writing, BlockFi offers a 6% APY for deposits under 2.5 BTC and a 3% APY for deposits above 2.5 BTC. 

First of all, that is not a bad return on investment. However, that does not factor in the volatility of the price of bitcoin. Remember the previous section?

The price can swing up 1325% or down 72% in a single year. A 6% return on your investment does not mean much when the value of the underlying asset has dropped 72%.

A Better Way To Look At Bitcoin?

Trying to create a yield curve for bitcoin is similar to trying to force a square into a round hole – it just doesn’t work. Sure, you could do it, but a yield curve is simply not the best tool for analyzing bitcoin. 

A better strategy, in our opinion, is to simply view bitcoin as a more speculative, unpredictable investment rather than something that can be accurately predicted in the future. 

That said, it is possible to somewhat predict the price of bitcoin. All one has to do is follow the pattern with bitcoin rising in price about 9 months after the mining reward is halved. It is by no means guaranteed, but the pattern has held true for all the previous halving cycles. 

Final Thoughts

That covers it for if it’s possible to create a yield curve for bitcoin – it’s not possible to create a true yield curve for bitcoin. It is possible to create some expected yield on your bitcoin holdings with BlockFi, but the volatile price of bitcoin makes any sort of yield curve essentially meaningless. 

As mentioned previously, you should not view bitcoin as an investment with any sort of yield. View it as something more like gold that has a volatile price that can earn 500% returns if you purchase at the right time. 

In fact, with returns like the ones that bitcoin has seen, who cares about a 5% yield?