DeFi Real Yield
What is Real Yield in Crypto?
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In economic terms, real yield refers to the difference between the value of the cryptocurrency at the time of purchase and the value of the cryptocurrency at the time of sale adjusted with the impact of inflation and expressed as a percentage. Thus, if the impact of inflation decreases the value of the cryptocurrency during a holding period, the real yield would be lower than the return on investment (ROI).
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Donβt forget to take fees, taxes, and expenses into account before computing for ROI as these are indirect factors that could affect your real yield.
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How Do You Find The Real Yield?
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As mentioned, you can find the real yield by calculating the return on investment (ROI) and then adjusting for the impact of inflation on the value of the investment. Its mathematical term can be expressed as:
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Real Yield = (ROI - Inflation Rate) / (1 + Inflation Rate)
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Where,
βROI - refers to the return on investment
βInflation Rate - refers to the rate of inflation over the holding period, expressed as a percentage
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For example, you invested 100$ in a cryptocurrency and sold it a month later for 150$. In this case, your ROI would be 50% coming from (150 - 100)/100 = 0.5. If the inflation rate during the holding period was 5%, you can compute the real yield as follows:
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Real yield = (0.5 - 0.05)/(1 + 0.05) = 0.428 = 42.8%
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This could be understood as β50% capital gains from your investment is translated into 42.8% real yield after adjusting for inflation rateβ.
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What is a Real Yield Curve?
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To create a real yield curve for a cryptocurrency, you would need to have data on the return on investment (ROI) for the cryptocurrency over different time periods, as well as data on the inflation rate for each time period. The real yield for each time period can then be calculated by adjusting the ROI for the impact of inflation.
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For example, given that an investor invests in a cryptocurrency in a period of 5 years having a 10% marginal increase in the ROI yearly, a fixed 5% inflation rate, resulted in the real yield crypto as the table below:
Thus, we can plot the real yield chart compared to the ROI chart as follows:
However, on an economical term, the real yield curve is a graph that plots the yields of fixed-income securities against their maturities, taking into account the impact of inflation on the value of the securities while the nominal yield curve does the same without adjusting for the impact of inflation.
What Happens When Real Yields Go Up?
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A rise in real yields can translate directly to the investor's wealth. In cryptocurrency terms, a rise in real yields reflects a higher capital gain from investment and/or a lower inflation rate which makes the investor truly better off.
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However, in economic terms, a rise in real yields can lead to several outcomes as follows:
Make it more expensive for businesses and governments no borrow money and investors get higher interest rates
Stronger currency due to an increase in foreign investments in the country
Make fixed income securities more attractive
Higher yield lead to lower stock prices as investors may shift to invest in fixed income securities
Why Are Real Yields Important?
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Real yields are important because they provide a more accurate measure of the return on investment in which usually many factors are unaccounted for. They are also important for policy issuers and central banks, as they can be used to gauge the impact of monetary policies and the overall health of an economy.
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For investors, real yields are used to gauge the true purchasing power that they will receive upon the sale of their assets. Without real yield calculation, investors cannot really gauge whether they are worse or better off by taking out the effect of the economyβs inflation.
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