The economic uncertainty brought about by the spread of the coronavirus has been the source of much stress and much systemic reorganization over the past several months. As a result--and perhaps somewhat ironically--this seems to have caused an uptick in public interest in cryptocurrency.
This is evidenced in part by data collected by CoinMarketCap: in early May, the crypto data site published a report showing some significant statistics regarding quarterly growth in the first three months of 2020: there was a 43.24% increase in the number of female users on its website; there was also a 46.04% average increase in users 18 to 24 located across the globe.
Also, Yahoo! Finance reported on May 20th that the price of Bitcoin “is faring very well during the pandemic, up 94% since March 16th.”
However, it seems that not everyone who is getting into the world of cryptocurrency for the first time is jumping in headfirst as a full-on Bitcoin hodler or crypto trader.
Instead, it seems that people entering crypto for the first time ever may be taking advantage of an increasingly common product in the cryptocurrency space: depositor accounts that allow users to earn interest on their Cryptocurrencies or fiat currencies, commonly known as “interest-bearing cryptocurrency accounts.”
Interest-bearing cryptocurrency accounts originally appeared on the scene as far back as 2014, but didn’t seem to begin gaining serious transaction until 2019, when Bitcoin.com reported a “Cambrian explosion of crypto interest schemes.”
Are "crypto interest schemes" the future of crypto?
Since then, these “crypto interest schemes” have only continued to grow in popularity. Zac Prince, chief executive and founder of cryptocurrency lending and earning company BlockFi, told Finance Magnates that “we’ve seen incredible growth in BlockFi Interest Accounts over the past year.” According to data from LinkedIn, BlockFi was founded in June of 2017.
“As crypto continues to become more familiar to the general population and more people realize how much they could be earning, we expect to see those numbers continue to climb.”
Zac Prince, founder and CEO of BlockFi.
A significant percentage of this growth seems to have taken place in the post-corona era: “to put some of the recent growth in perspective, after launching our new mobile app in beta in late April, we saw a more than 30% week-over-week growth in funded accounts,” Prince said.
Additionally, Celsius chief executive and founder Alex Mashinsky told Finance Magnates in an email that “we just crossed 100,000 registered users and have over $600m in assets on deposit, [and] since March we have seen a tripling of signups with Celsius.” He attributed part of the growth to the launch of what he described as “the first-ever gold token to pay interest in gold (XAUt) with a 4% yield.” Celsius was founded in February of 2017, according to data from LinkedIn.
COVID-19 could be driving interest in crypto, and interest-bearing accounts may be a gateway to the crypto space
What’s driving this surge of interest in crypto--and interest-bearing crypto accounts in particular?
It may well be that as the Fed and other central banks around the world have continued to figuratively ‘turn on their money-printing machines’, individuals and corporations around the world have begun to wonder in a serious way about the security of their financial futures.
This is for several reasons: for one thing, the across-the-board financial market crashes that caused the world to spiral into economic panic in mid-March revealed the fragility of the global financial system. While markets have recovered to a large extent, people and companies around the world seem to have become perhaps wary of the kinds of investments that they would readily make before.
Alex Mashinsky, founder and CEO of Celsius.
Another level of financial insecurity has been added by economists and analysts who believe that the quantitative easing and stimulus efforts that governments around the world have launched to combat the financial effects of the coronavirus could lead to high levels of inflation in the relatively near future.
Finally, and perhaps most acutely, there are those of us whose jobs and livelihoods have been lost due to the fallout from the coronavirus.
Therefore, individuals around the globe are beginning to question the status quo of the financial world as they have come to know it, and crypto--with its anti-establishment and arguably anti-inflationary doctrine--may seem more viable as an investment than ever before.
Indeed, Celsius’s Alex Mashinsky said in a recent interview with Finance Magnates that unlike investing straight in Bitcoin--which may seem intimidating and risky to most people, even those who are interested in cryptocurrency--interest-bearing crypto accounts are “a product that applies to 100 percent of the population.”
How do interest-bearing crypto accounts work?
These accounts function as an integral part of the cryptocurrency lending industry, which has famously performed extremely well when the rest of the cryptocurrency space was suffering, including during the cryptocurrency “winter” of 2018. The accounts provide the resources that lending companies use to make loans.
Essentially, the concept of interest-bearing crypto accounts “is based on rehypothecation of the assets to institutions to earn yield from interest and then give that back to depositors,” Alex Mashsinky explained, adding that while “each company is different,” he claims that “Celsius has invented this category, and since, others have tried to copy our model or try other models, like DeFi and Crypto.com.”
Celsius, along with other companies in the space, essentially allows users to earn on cryptocurrencies and fiat currencies they deposit into their accounts. “Celsius paid its community over $13m in BTC and ETH interest since its service was launched in June 2018. We believe we paid more interest than all the competitors put together and are the only ones who publish what we earn and what we pay out each week.”
BlockFi’s Zac Prince told Finance Magnates that “interest-bearing crypto accounts are similar to traditional interest-accruing bank accounts, except that the interest rates tend to be higher,” adding that “at BlockFi, they can be up to 8.6% APY for stablecoins.”
Celsius’s Alex Mashinsky said that his company’s wallet provides users with asked to "a basket of non-dollar-denominated assets with yields up to 11%: thirteen [Blockchain -based assets] such as BTC & ETH; a gold token which yields 4% in gold; and stablecoins, including [coins pegged to the] British pound, canadian dollar and others yielding 11%.”
Other companies, such as Crypto.com, offer levels of return around 8%, along with a number of other variations on crypto-lending and interest-bearing account services.
How can crypto lending companies offer such high rates of return on interest-bearing accounts?
To the onlooker, the first question may simply be regarding how these companies are able to offer such high rates of return.
Traditional banks can’t offer such high return rates because of that element of volatility in crypto – sometimes it’s a weakness, and other times it can be a real strength,” Zac Prince explained.
“Since crypto is a more volatile asset class, interest rates for loans in this category are higher than they are for traditional assets. That means we’re able to pass that value along to our interest account holders who are providing the capital.”
Celsius’s Alex Mashinsky, on the other hand, believes that “banks can offer higher rates than Celsius, as they earn 13-17% return on capital (see their SEC quarterly filings), but they choose to take all that profit and pay the shareholders dividends and do stock buybacks, while we focus on returning all of that to the depositors.”
”From a big picture stance...what is the risk you are taking for the interest [being earned]?”
In any case, on its face, the process of signing up for an interest-bearing crypto account may seem quite simple: after going through a KYC check, users simply deposit either crypto or fiat currencies into their accounts, and the earnings begin.
However, Alex Batlin, chief executive officer of cryptoasset custody solution provider Trustology, explained to Finance Magnates that while the onboarding process may only take a few minutes, there is a lot more to take into consideration when it comes to the particular kind of service that a depositor is looking for.
Indeed, the way that these accounts work “depends on what you are going for and your risk profile and appetite,” Batlin said adding that the phrase "interest-bearing accounts" can be “somewhat misleading, as it’s not clear on the risks being taken [in exchange] for the interest.”
Alex Batlin, ex-Blockchain Lead at BNY Mellon and current chief executive of custodial wallet specialist Trustology.
In other words, a potential depositor in one of these interest-bearing account services needs to think “from a big picture stance.”
“Here’s what needs to be considered: what is the risk you are taking for the interest [being earned]? Is it collateralized or uncollateralized?,” Batlin explained. “Who are you lending to and for what purpose? What’s the credit rating of the borrower, and what’s the risk of the borrower defaulting or the lending platform collapsing, for that matter? “
Therefore, although it may be “exciting that in our space we’re leading with interest-bearing tokens,” the fact remains that “people shouldn’t be fooled as the same risks in traditional finance still apply”--which is to say, low-risk, low returns; high-risk, potentially higher returns.
Risks and returns for interest-bearing crypto accounts
So, what is the risk profile when it comes to a typical interest-bearing crypto account service?
“For uncollateralized lending, where the lending platforms don’t have enough insight into the borrower profiles, it’s high-risk,” Batlin said.
Celsius’s Alex Mashinsky also told Finance Magnates in an email that indeed, “there are many risks when you give out your keys, some have to do with the wallet security… [as well as] the reputation of the lender and their legal status, who is borrowing and their credit stability or ability to repay the coins,” adding that “Celsius requires collateral while others don't.”
Mashinsky also pointed out that it is in depositors’ best interest to know whether “the company actually is earning any or all the interest you get paid.”
“We don’t believe any other company in the space is earning the rates they pay, meaning they are all subsidizing these rates from investors money,” he said.
Safety and security matters for depositors in interest-bearing crypto accounts
Therefore, when researching interest-bearing crypto accounts, it’s very important to check the typical borrower profile for the company’s lending business. For example, BlockFi’s Zac Prince told Finance Magnates that “we’re able to provide such strong returns for account holders thanks to our business model, which generates interest on deposited assets by lending them to our trusted institutional and corporate borrower[s].”
Additionally, Prince said that “to ensure asset value is retained and loan performance remains satisfactory, we lend crypto on overcollateralized terms and use a highly-trained automated risk management system to monitor positions at all times. We can also terminate a borrow quickly if needed, saving balances to facilitate client withdrawals from interest accounts.”
However, despite the fact that cryptocurrency lending companies may have high standards for borrower eligibility as well as other security measures in place, potential interest-bearing account depositors may be turned off by a general lack of insurance in the industry. Most, if not all,of these firms are not FDIC insured; some may not be protected by any other large-scale private insurance.
So far, none of these companies has experienced a large-scale hack of funds, but BlockFi did experience a data breach last week that resulted in some users' personal information being compromised.
However, because of the lack of insurance, many of these companies rely on strong security measures to protect their holdings,. Celsius’s Alex Mashinsky said in a recent interview with Finance Magnates that his company “is not a bank–we don’t have FDIC insurance or anything like that.”
Rather, “we rely on having very robust security to make sure that none of our depositors will be affected [in case of a security breach],” Mashinsky said. “We use companies like Fireblocks, and PrimeTrust, and others, who are the technology providers.”
“Fireblocks, for example, has a $20 million insurance policy on their hot wallet–it’s one of the very few companies that has hot wallet insurance,” he continued. “Most other companies will tell you that they have insurance on their cold storage–but when you’re lending coins out the coins are never in cold storage, so the insurance is meaningless.”
“Celsius partnered with Fireblocks to provide hot wallet insurance, so while coins are transiting–either being deposited or being lent out–they are protected as well.”
Interest-bearing crypto accounts could bring new people into the space
Therefore, in a cryptocurrency lending company that operates with high borrower standards and robust cybersecurity measures, the primary risks associated with becoming an interest-bearing crypto account holder are not necessarily liquidity- or custody-related.
Instead, BlockFi’s Zac Prince explained, “the primary risk in crypto interest accounts is the same risk behind crypto more broadly, in that it can be a volatile asset.”
Still, these interest-bearing accounts may provide an accessible, user-friendly opportunity to bring new investors into the crypto space.
“We believe interest accounts are one of the most important tools for scaling crypto adoption, but the delivery and accessibility of products like these are just as important as the interest you can get from them,” he said, adding that BlockFi’s services include a mobile app, and will soon include a consumer credit card that offers Bitcoin rewards. Other companies, including Crypto.com and Celsius, offer similar products.
“If people don’t feel empowered to take the first step and begin their first crypto investment, the interest means nothing.”
What do you think about the ability of interest-bearing crypto accounts to bring new users into the space? Let us know in the comments below. Finance Magnates also reached out to Crypto.com (which was mentioned in this piece) for commentary, but did not hear back before press time. Comments will be added as they are received.
