How can I earn interest on Crypto?
Earning interest on your Crypto through lending is one of the hottest topics to arrive within recent years. Many investors feel that a new paradigm has arrived that means they not only can hold their crypto, but put it to work to earn additional crypto as well. While this might seem new and exciting, lending markets have been around for many years. Investors who desire to earn interest on their crypto need to not only understand the benefits, but the risks as well. These risks are almost never fully understood and unfortunately, most companies offering lending services do not clearly disclose these risks because they desire profit while leaving you with the risk.
What is Crypto Lending? Lenders vs Borrowers.
Lending is the act of giving another person/company something that you own, with the hope that they return it with interest. In the crypto market, this means the company holding your crypto (the custodian & lender) will remove crypto from its secure cold storage wallet and give it to another company (the borrower). In most cases, the borrower may not have the same strict security protocols that you desire for storage. The borrower can now do whatever they want with the crypto, as long as they pay interest. We will go into interest rates later, which is important to consider when looking at risks vs rewards of crypto lending.
Why would anyone borrow crypto?
The most common reason that companies borrow crypto is in order to short, this means they sell the crypto and hope to buy back lower for a profit. As seen with the recent Gamestop fiasco, companies who short have the potential to go bankrupt and not be able to pay back their lenders – in this case, potentially you. In July 2020, the well-known Ethereum shorting investment group Tetras Capital shutdown.
Lending and borrowing has created the realm of fractional reserves. Anyone who has studied investment markets and economics knows that fractional reserves are something to watch out for.
What are Fractional Reserves? Investors Beware.
Fractional Reserves are when a company doesn’t maintain 100% of the assets it owes to customers. This means that instead of keeping 100% of the funds in their institutional wallet, assets are given away to Borrowers in order to earn interest. This introduces many risks, including bankruns; the ability to not be able to withdraw your crypto because your crypto is no longer with your custodian. There are an endless number of examples of bank runs throughout history and we will eventually see one within the crypto industry as well. Ensure you are not one of the victims when this occurs.
Please Note: iTrustCapital is devoted to maintaining full 100% reserves at all times. All customer funds at all times are stored with our institutional wallet provider Curv. We do not condone giving away customers assets to other companies, as we believe that almost zero risks should be taken when it comes to Crypto IRA retirement accounts funds. We stand by our institutional wallet infrastructure and believe it’s the only secure place our customer funds should be.
What are the risks of Crypto Lending?
While many risks exist, the two biggest risks are:
- Security Risk: Once your crypto is removed from your custodian’s cold storage and given to the borrower, that borrower has the potential to be stolen from or hacked, losing the crypto.
- Solvency Risk: As with any lending market, there is a risk that the borrower will not be able to pay back what they owe in full. This can be due to many reasons and history has shown numerous crypto funds that have shutdown due to solvency risk. Example 1, Example 2, Example 3.
How much interest can I earn?
If you desire to take the risks associated with Crypto Lending, ensure you are fully compensated for the risk. You can always find the most up-to-date crypto rates by viewing the three industry leaders, BlockFi, Celsius and Nexo. Right now standard industry rates are around 5-6% for Crypto (Bitcoin, Ethereum…etc) and 8-9% for Dollars (including stablecoins).
Beware of companies who will try to lure you in with false marketing around rates, you may find they advertise high rates but their real crypto rates are as low as 2-3%. This means that they are likely earning the true industry rate, leaving you to take all the risk and earning only the difference. We do not condone such activity. Always get claimed interest rates in writing before agreeing to work with a company.
Will iTrustCapital offer interest?
We are looking at various ways for customers to earn interest, this might be through Staking, Lending or both. Luckily, Decentralized Finance is showing early promise that may allow our clients to earn interest without ever moving to a fractional reserve system like other companies. Security, safety and customer experience is our #1 priority, which means we will continue to research, develop and deliver the best offerings in the market. We plan to announce the iTrustCapital Interest Program by Q3 2021 and we can assure you, it will impress.