High-Yielding Crypto Interest Accounts by CeFi Platforms
The crypto world is evolving fast. The 1.5 billion bitcoin purchases by Tesla may spark more deliberations by corporate treasury departments regarding whether they should hold some cryptos to preserve value and diversify a bit from fiat currencies.
This is especially salient at a time in which a growing segment of the world’s population are becoming concerned about the role of centralized governance system in the modern world. For example, the stock of M1 has been increasing at an unprecedented pace since the second quarter of 2020 in the US. You may find similar patterns for most other central banks around the world. When the money supply is almost doubled, prices for speculative assets skyrocket, as is the case for tech stocks and crypto currencies currently. If the economy doesn’t really pick up quickly, this may lead hyperinflation around the world with respect to fiat money.
In our view, we are likely in a speculative asset bubble, fuelled by an excessive supply of “hot” money around the world. The bubble is likely concentrated in many tech stocks and crypto projects. From another perspective, the rise in the value of cryptocurrencies could actually reflect inflation measured using fiat money. And therefore, appreciation of cryptocurrencies may be partially justified. While some tech stocks and crypto projects are going to prevail and prove their worth, most will likely retreat when the bubble bursts eventually or when the tide fades.
As the US Treasury starts to recognize and regulate stablecoins, there is an opportunity for crypto stablecoins to grow. What are stablecoins? These are cryptocurrencies “pegged” to fiat currencies using some mechanisms. The ones that I trust the most currently is USDC. Each USDC issued is backed by one fiat USD minted at the issuer (Circle) and can be redeemed for one fiat USD easily in the current financial system. Stablecoins may gradually become an integral part of people’s assets due to the current high yields at various CeFi (centralized finance) platforms and DeFi (decentralized finance) platforms.
What are CeFi platforms? These are centralized crypto financial institutions that generally mimic the operations of banks in the fiat world. Their main operations include taking crypto deposits from HODLERs (people who hold cryptos for long-term appreciation) and lending the cryptos to crypto exchanges, institutional crypto investors (mostly hedge funds) and other HODLERs (who mostly need fiat money) on a collateralized basis mostly. However, these are not real banks as they are not regulated by any real-world authorities and the “deposits” are also not protected by any government-sponsored savings insurance programmes.
Currently, notable players in the CeFi space include Celsius Network, BlockFi, NEXO. They offer 5%–9% yields on common big-name cryptos such as Bitcoin (BTC) and Ethereum (ETH). However, they generally offer much higher yields from 8% to 27% on crypto stablecoins such as as USDC, TUSD, USDT. Among these three stablecoins, Tether(USDT) is the most liquid and widely used in cryptoexchanges for trading purposes. However, it may not be fully backed up by USD by the issuer and there are rumors that Tether could be the next SEC target for investigation after Ripple. On the other hand, USDC and TUSD are fully backed by fiat USD reserves minted at the issuer. Among these two, USDC is the second most liquid and can be easily redeemed for fiat USD in many platforms without cost.
High yields offered by these CeFi platforms on stablecoins offer attractive investment opportunities for people who seek high-yielding and “less volatile” investment products. This contrasts with the meager 0%-1% yields on bank deposits in most developed regions of the world. In the near term, we believe that this presents an attractive high-yield opportunities for people who jump on the bandwagon early. The booming crypto market fields the current high demand for crypto loans by exchanges as well as hedge funds and thus the high yields commanded by crypto deposits. As more people put their money in these CeFi platforms, we expect future yields to drop gradually due to the increased supply. Alternatively, if the crypto market dwindles, we expect future yields to drop due to decreased demand.
One caveat though is that these high yields do come with other types of risks. As these CeFi platforms are largely unregulated, there is little transparency regarding what they actually do with your crypto deposits. Little can be done to stop the founders of these platforms to seize all your crypto deposits and run away with them. At this moment, since this is a booming business, we see little expropriation risks by the founders in the near term. In addition, there are cybersecurity risks. Once your account is hacked and compromised, you may lose all your crypto holdings.
Another important risk to consider is analogous to “bank run” in the fiat world. Some reports mention that these CeFi platforms commonly engage in a practice called “rehypothecation”, which is an aggressive lending practice to lend the collaterals “multiple times” for higher yields. Some question that this practice is partly responsible for the subprime mortgage crisis in 2007–2010. It is unclear to what extent these CeFi platforms can stand the test of a significant crypto market crash. We prefer diversifying our “deposit” holdings to multiple CeFi platforms. However, diversification among these CeFi platforms could be futile in the unlikely event that they all failed in times of crisis.
Beyond the high-yields provided by these platforms, many of them — Celsius Network(191659b7fb), BlockFi(5292c7e9), Voyager(YUE50A) — offer new customer bonus using referral codes (some examples included in parentheses) from existing customers as well as first deposit bonus. These bonus amounts generally range from $10 to $40 and can be in the form of either BTC or USDC. In addition, some of them (e.g. Celsius Network) offer deposit bonus regularly from time to time. These may help to increase your total yield by putting your “money” into these CeFi platforms!
Update: it was very recently reported that ApyHarvest is a scam.
