It’s time to make your BTC productive again

6 min readMar 24, 2025

TLDR;

There are three potential approaches to generating Bitcoin yield whilst maintaining a long Bitcoin position, namely basis trade, lending and options.
Apart from institutional offerings, users can generate Bitcoin yield in decentralised finance markets, such as yield-generating stablecoins and staking.

Disclaimer

The information contained within this newsletter is purely educational and should not be viewed as financial advice. Always do your own research before making any investment decisions.

The crypto market slightly rebounded this week, as BTC hovered at $85k, ETH at $2k and SOL at $130. Despite the sluggish pricing momentum, Bitcoin is continually being adopted by institutional investors, sovereign funds and public companies. Recently the Abu Dhabi Sovereign wealth fund Mubadala disclosed that it held bitcoin through the Blackrock ETF.

As Bitcoin, similar to other commodities, does not have a native yield, strategies have emerged that can generate a ‘yield’ on your BTC.

With more than 94% of Bitcoin already in circulation, Bitcoin price is predominantly demand driven as the effects of new supply have greatly diminished. As Bitcoin has matured as an asset, volatility has also fallen over time and with many holders now prepared to look at the medium to long term allocation as part of the portfolio, generating yield has become a key topic.

In recent years, Bitcoin has been widely regarded as the most desired collateral in the digital economy. By using Bitcoin as collateral, investors turn a passive Bitcoin holding into a yield-generating investment. This can be done through DeFi, which BTC holders can convert BTC to tokenised solutions (e.g. wrapped BTC, Stacks sBTC) and use those to generate yields in DeFi protocols.

As gold has reached all time highs, Bitcoin corrected 20%, reminding investors that Bitcoin has key idiosyncratic features.

Bitcoin: Bull Markets (bottom) and their drawdowns (top)

Source: Coinbase Asset Management

Here are some ways to make your BTC productive.

#1 Institutional Bitcoin yield funds

There are three potential approaches to generating Bitcoin yield whilst maintaining a long Bitcoin position:

Bitcoin basis trade: In digital assets, it generally refers to buying spot and shorting futures. The objective is to capture the spread or funding rate between spot and futures. While the funding rate can fluctuate, future prices are expected to converge towards the spot price. According to Coinbase Asset Management, over the last three years this has generated a yield of between 5–10%.
Funding rate volatility is a key risk of basis trade. When funding costs spike or flip against your position, it can turn your winning trade into a loss. In addition, it’s important to maintain sufficient collateral, as a sudden 10% — 20% price drop in crypto could wipe out a leveraged position.
Bitcoin options: Selling out-of-the-money (OTM) call options to seek yield. Such Bitcoin yield funds use active call options trading to generate compounding yields while maintaining full BTC exposure. In addition to Bitcoin price movements, these strategies extract alpha from selling calls at optimised strikes and tenors.
When trading Bitcoin options, it’s important to stay aware of time decay, volatility risks and liquidity risks. In times of volatility, the wider bid-ask spreads can make entry and exit costly, making it harder to execute trades at favourable prices.
Bitcoin lending: Lend Bitcoin to well-capitalised businesses that seek to use Bitcoin in their operations. For lending, one should bear in mind collateral risks and interest rate volatility.
In addition, counterparty risks exist for the aforementioned yield generating strategies.

Gross average historical funding rates: 2024 — present

Source: Coinbase Asset Management

Institutional investors are actively looking for dual-managed Bitcoin strategies to preserve capital whilst generating additional yields.

#2 Bitcoin DeFi

Another way to earn yield is converting your BTC to tokenised BTC solutions, and using them across Bitcoin DeFi protocols to generate yields. For instance,

Generate yields through stablecoins: Users can lock Bitcoin as collateral to mint stablecoins, and use that stablecoins to other DeFi protocols to generate extra rewards. For instance, users can stake Hermetica’s USDh for yields, generate extra yields by borrowing against Stacks sBTC or supplying USDh to decentralised exchanges.
To mint USDh, users need to deposit Bitcoin, which is the collateral that backs the delta-neutral derivatives position. This involves collateral management risks, as any operational failure of Hermetica may lead to an uncovered position and hence lead to a value loss for USDh. Exchange risk is another potential pitfall where USDh is unhedged in cases of hacks. To mitigate this risk, Hermetica team uses an off-exchange settlement system and uses multiple exchanges to avoid a single point of failure.
Stacks sBTC: Users can lock their BTC to earn sBTC, and use it across Bitcoin lending protocols (e.g. Arkadiko) and liquidity provision on DEX (e.g. Velar) for extra yields.
Each sBTC token is backed by an equivalent amount of Bitcoin in the peg wallet, maintaining a 1:1 ratio at all times. The peg wallet is managed by a decentralised network of signers, who facilitate sBTC deposits and withdrawals for users. The dynamic set of signers are rewarded BTC for processing sBTC transactions.
The use of sBTC in DeFi networks is subject to risks of a decentralised network, such as possible network disruption and potential misbehaviour of validators.
Staking through Babylon: Protocols such as Babylon allow users to stake their BTC, which earns staking rewards and help to secure Proof-of-stake blockchains. By staking BTC in Babylon, users earn Babylon points and potentially project’s native tokens that are secured by Babylon network. Compared to wrapped Bitcoin (wBTC), Babylon BTC staking is non-custodial and users do not need to worry on security concerns of using cross-chain bridges. According to DeFillama, there are $4.4B worth of assets currently locked in the Babylon protocol.
Similar to other staking protocols, there are inherent risks in participating in Bitcoin staking. In Babylon users need to delegate their BTC to Finality provider (delegators) for receiving staking rewards. The amount of staking rewards will depend on delegator’s security and network performance. In addition, the withdrawal of staked BTC in Babylon took approximately 7 days to process, which the short term illiquidity of user’s BTC will lose in value at times of huge market volatility.

Stacks sBTC peg in (Deposit) and peg out (Withdrawal) mechanism

Source: Stacks

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About Aspen Digital

Aspen Digital is a digital asset technology platform that enables wealth managers to offer their clients access to the emerging asset class. Through one platform, wealth managers and their clients can be connected to a range of counterparties across exchanges, staking providers, structured products and custody helping the managers to understand the eco-system. Furthermore, the solutions provide connections and introductions to top Web 3 funds and projects across the venture and hedge fund space which allows wealth managers to build a holistic portfolio for their clients. Aspen Digital was co-founded in 2021 by Everest Ventures Group and TTB Partners, and is backed by notable investors such as the Rothschild Family (through RIT Capital), Liberty City Ventures and a number of other prominent Asian funds, single and multi-family offices.