To understand Harvest Finance (CCC):FARM USD) you have to understand yield farming.
Source: Max_555 / Shutterstock.com
I’ll get to that in a moment, but first it’s also important to understand why the token at #453 is on your radar in the first place. The answer to that is that Harvest Finance fell massively on December 27th.
Within a day it went from around $100 to briefly $250. I can’t find a definitive explanation as to why this happened, but it happened. FARM-USD is now trading around $140. So that aside, let’s get back to what it actually is.
Yield farming with crop financing
According to its website, “Harvest is an international cooperative of humble farmers pooling resources to generate decentralized finance (DeFi) returns. When farmers deposit, Harvest automatically uses those deposits to farm the highest yields using the latest growing techniques.”
If that sounds a bit like borrowing money to make money, it should. To earn returns from your crypto, you must do exactly what you would do with your money: lock it up and trust it to others.
Just as you lend money to a bank to get a nominal return, the same can be done with crypto. Locking crypto is called “staking”. Here’s the really interesting thing about staking:
Since the beginning of yield farming in 2020, yield farmers have achieved returns in the form of Annual Percentage Yields (APY) that can be in the triple digits. But that potential return comes with a high level of risk, as the logs and coins earned are subject to extreme volatility and carpet pulls, where developers abandon a project and walk away with investors’ funds.
Therefore, it is very clear that quick returns are possible with this strategy. And given that FARM-USD has risen so significantly lately, people will be interested.
Issues of crop financing and yield farming
There is also a very big legal asterisk here regarding yield farming and harvest finance. According to Harvest Finance’s website, Harvest is currently “not available to individuals or businesses residing in the United States due to regulatory uncertainties.”
In simpler terms, US-based investors cannot use Harvest’s yield farming platform directly and must purchase FARM-USD tokens through an exchange such as Coinbase (NASDAQ:COIN).
And there’s definitely some regulatory uncertainty surrounding yield farming, as the Securities and Exchange Commission (SEC) has begun to turn its attention to the relatively new practice.
So what’s the real benefit of Harvest Finance, aside from the potential for rapid value appreciation?
Automation is key
Investors who put their capital into Harvest Finance do so in part because it automates yield farming.
One way to farm is to do it manually. I’m not talking about growing crops, I’m talking about yield farming. However, both forms were once manual. Luckily, advances in technology have made the process of planting and harvesting much more efficient and profitable. The same applies to yield farming.
Manual yield farming is tedious because you need to identify the best place to stake your cryptos. It’s also expensive because it’s subject to high gas fees. Harvest Finance automates the process of yield farming on so-called farms. There are more than 100 from which it seeks returns.
How does it work?
Let’s say Harvest generates a yield. In this case, 70% of the income goes back into the deposit pool. The remaining 30% will become FARM USD tokens to reward those who placed first, among other things.
It is also interesting – if I understand you correctly – from the point of view of care. It currently has a circulating stock of 877,230 tokens but a total supply of only 690,420 tokens.
The website speaks of a total duration of more than four years. So, if I understand correctly, this means that the supply will decrease in the future. In theory, this should increase the value of all current tokens in the future.
What to do with Harvest Finance?
To be honest I don’t know much about yield farming. The premise is not too different from interest in the current banking world. The mechanics, as well as the legalities, differ, but it makes sense on a certain level.
What worries me the most is that there is a dark side to the quick returns that users have been experiencing recently with FARM-USD: volatility.
Last year, Harvest Finance was $410, and it was $40. It kept going up and down.
Adding to the risks here, Harvest Finance was hacked once last year and could happen again.
Dive in if yield farming interests you, but beware of the many risks.
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At the time of publication, Alex Sirois had no position (either directly or indirectly) in any of the securities mentioned in this article. The opinions expressed in this article are those of the author and are subject to InvestorPlace.com’s publicity guidelines.
Alex Sirois is a freelance contributor at InvestorPlace whose personal stock investing style is focused on long-term, wealth-building, buy-and-hold stocks. He has worked in various industries from e-commerce to translation to education, leveraging his MBA from George Washington University. He brings with him a variety of skills through which he filters his writing.
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