The simplest and easiest way to make money in cryptocurrency: Hold & Earn. You can earn just by holding; almost all mainstream exchanges offer financial services, referred to as exchange-based financial management (CeFi), mostly focusing on demand deposits, which can also be called exchange demand deposits.
There are two major advantages to exchange-based financial management: it is very easy to operate + relatively safe (compared to complex on-chain operations), making it very suitable for beginners or those who prefer a hands-off approach.
What is cryptocurrency exchange-based financial management? What are the risks?
Financial management is one of the common services offered by cryptocurrency exchanges, allowing held cryptocurrencies to earn interest like deposits, helping us earn more money. The most basic risk is the exchange going bankrupt, while the more advanced structured financial management may have additional asset risks.
Q: What is a cryptocurrency exchange?
A: A place to trade cryptocurrencies, similar to a cryptocurrency version of a securities exchange; to use the exchange, you need to register an account, and the cryptocurrencies held in your account are also custodied by the exchange.
Q: What is cryptocurrency exchange-based financial management?
A: Cryptocurrencies stored in exchange accounts are idle when not traded, which means they can't earn money and waste capital efficiency. Exchanges provide additional financial management services that allow us to utilize idle assets and earn extra income.
Q: What risks are associated with cryptocurrency exchanges?
A: Banks have deposit insurance, and stocks in securities exchanges have collective custody, providing some level of protection. However, assets in exchanges do not have deposit insurance; they are managed by the exchange. If the exchange is hacked, misused, or poorly managed, the assets we have there may suffer losses.
Exchange-based financial management can be subdivided into three main categories, with the most common being demand/time deposit financial management, which is also the simplest.
Earning coins on-chain means the exchange helps you take coins to earn on-chain. Unless it's a special cooperative activity, because of the additional risks involved, if you want to earn on-chain, it's better to do it yourself rather than going through the exchange.
Structured financial management adds options mechanisms, making it more speculative, not suitable for mindless investment options, and not recommended for beginners.
Demand Deposit / Time Deposit
Taking the Bybit exchange interface as an example, Finance > Financial Management > Bybit Savings, the products here are demand/time deposit financial products.
Find the cryptocurrency, click to view the plan, and then stake it immediately. The operation is very simple and similar to online banking fixed deposits, without needing on-chain operations.
Key point: The returns on demand and time deposit financial management are in the same cryptocurrency; you earn what you deposit. Demand deposits can be redeemed at any time, while time deposits may not be redeemable early, and early redemption may result in loss of interest.
Earning coins on-chain
Earning coins on-chain means the exchange takes your coins to operate on-chain, earning on-chain returns. The exchange helps you put your money on-chain, but you have to bear additional risks, including risks from that chain, that protocol, etc. Also, although it appears to show demand deposits and can be redeemed immediately, on-chain redemptions can sometimes have a waiting period. You can redeem at any time, but it may take several days or even weeks to receive your funds.
Unlike demand deposit financial management, sometimes the deposited coins and earned coins may differ, depending on on-chain activities. Since the on-chain part is handled by the exchange, the actual operation is very simple, like demand deposit financial management.
Structured Products
No matter which exchange, if you see the term 'structured,' it indicates a connection to options, which are not traditional financial products but incorporate mechanisms like futures and options.
One of the characteristics of options is leverage and the ability to profit from small investments. Although there is a risk of losing capital, it also provides opportunities for additional profits and is more inclined towards speculative strategies, not quite fitting into traditional financial management.
Due to the higher risks involved, it is advisable not to try it until you understand the mechanism, or to experience it with a small amount.
Things to know about exchange-based financial management
The return rate displayed on the interface is usually the APR (Annual Percentage Rate).
If you deposit for a whole year, you can receive this much; if the deposit period is less than a year, you won't receive such a high return rate.The return rate is variable.
Currently 10%, it may change to 8% tomorrow and then 16% the day after, depending on market conditions.Returns are usually calculated every minute and distributed daily.
Don't worry about fluctuations in the return rate; just calculate based on the current rate, which is distributed once a day. (Excludes structured products, as each structured product has a different mechanism)
Where do the returns from exchange-based financial management come from? Is it a Ponzi scheme?
Exchange-based financial management is not a Ponzi scheme. Different types of financial management have different sources of returns, briefly described as follows:
Demand Deposit Financial Management - Lending assets to other users in need of funds and earning interest as a return, suitable for investors who have coins and want to earn stable returns.
On-chain financial management - Participating in on-chain staking to earn staking rewards, or liquidity mining to earn liquidity rewards, suitable for investors seeking higher returns without wanting to operate on-chain themselves.
Structured Financial Management - Typically involves options trading, with returns coming from the financial mechanisms involved, where the 'time value' is key, suitable for investors who are more sensitive to price ranges.
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