Please click the link below to listen to the 56th episode of my weekly crypto podcast ‘Two Minute Crypto.’ These are intended to be short, single-topic ramblings on some aspect of the cryptosphere. Consider dropping a like and or a review on iTunes or Podbean if you enjoy the podcast. Comments and critiques welcome.
Welcome to Two Minute crypto. Today’s episode delves into an on the face of it – appealing opportunity in crypto – interest!
The last eighteen months or so have seen the launch of a wide array of interest-earning products for crypto. Block-Fi, Maker Dai, Crypto.com, and Nexo are currently the market leaders but the space is intensely competitive with many other projects vying for market share. At first largely limited to Bitcoin many platforms now offer interest on Ethereum, Litecoin, XRP, Binance Coin and more. Indeed, not only are more options being added but rates are on the rise with 6% per annum a rough average for BTC. In general, there are no-lockups, further differentiating these products from legacy saving accounts. All sounds great, right?
Not your keys, not your Bitcoin.
I’m sure you’ve read that before – most of you will no doubt be aware that placing your crypto on an exchange opens you up to a loss of funds. However, this counter-party risk is no less applicable to lending platforms. Once you deposit your funds -they are now at risk. From cold storage and long-term control and security to an IOU from a third party for an interest payment. If like me, you view Bitcoin as extremely undervalued in the long-run, you need to ask yourself: Is the reward worth the risk? For myself, the answer is no. Perhaps in time once a project has achieved a certain level of market maturity and an established track record of managing risk and adversity – perhaps then I will consider placing a small portion of my BTC in their hands.
But what of insurance I hear you say? Many of these platforms tout insurance protection to the tune of a $100 million dollars. Surely this is enough? No, it isn’t. First and foremost, the terms and conditions of said insurance will likely defy your full understanding. To what extent you personally will be covered for loss in this, that or the other scenario will require a complex understanding of corporate law. Critically, even if the insurance does cover your loss – how long might you have to wait to recover our funds 6 weeks, 6 months, 6 years? During all that time Bitcoin may accrue value but the policy will likely pay on value at loss. This might amount to pennies on the dollar of future BTC value.
Finally, will the insurance scale to the platform’s growth? Almost certainly no – so what started out as more than adequate coverage may over time fail to match the expansion of the assets stored on the platform. Such under-insurance would effectively reduce your cover to a marketing slogan.
Ultimately, this is an issue of trust. Placing your crypto on an interest-paying platform is an exercise in trust. Counter-party risk is anathema to the sovereignty that BTC offers – think long and hard before you make that trade.
Thanks for listening.