With the fast-growing decentralized financial sector providing new but high-risk money-making opportunities, traders obtain generous returns by lending cryptocurrencies.
The number of consumer-facing platforms that provide crypto balance earnings is growing rapidly, and the annual interest rate of various coins (such as Bitcoin and “stable coins” including Tether) is about 7% to 12%.
Traders can chase higher interest rates through “revenue farming”, which is to search in the decentralized financial world (or DeFi) to get the best benefits from more obscure projects and tokens. These short-lived opportunities can advertise interest rates as high as several thousand% to attract digital cash.
Experts say that the prevalence of sophisticated revenue generation strategies highlights concerns about whether cryptocurrency customers fully understand the risks they take.A recent study by the UK Financial Conduct Authority found that the public The understanding of encryption has fallen As digital assets have become more and more popular in the past year.
“For some retail investors, the risk is that they see ridiculously high interest rates, but they don’t really understand what’s going on behind the scenes,” said Fabian Schär, a professor of decentralized finance at the University of Basel.
Income platforms usually advertise their products as “savings wallets” or “interest accounts”, which seems to be a safe alternative to trying to play in the cryptocurrency market. The backbone of many platforms is to lend customers’ digital cash at an interest rate higher than that offered to customers, which is different from traditional banks. Some platforms also directly trade customer funds or provide loans to retail customers.
But these services are very different from the security of standard bank accounts. When investors face losses, there is relatively little supervision or protection. The high interest rates provided by the DeFi project also bring considerable risks from wrong agreements, hacking attacks, or market fluctuations.
Schär cautions against venturing into DeFi—a protocol that replicates many functions of traditional financial markets—for pure gain. He said: “This involves a lot of risk, you may lose everything.”
The strategy of earning interest from cryptocurrency balances has existed for several years, but with the collapse of the digital currency market, they have created new appeals to customers in recent months. Bitcoin is the largest digital currency by market capitalization. It has fallen from a high of more than US$60,000 in April to about US$34,000 on Thursday.
Allen Ng, chief executive of Kikitrade, a Hong Kong-based crypto application, said that earning interest through crypto balances is becoming more and more popular among customers as a way to make money “when the market is not suitable for trading”. The app recently launched an 8% “saving account”.
Noah Perlman, Chief Operating Officer of Gemini, headquartered in the United States, stated that providing interest products “almost allows customers who originally passively hold cryptocurrencies to earn interest”, thereby attracting new customers to use cryptocurrencies. In terms of consumer protection, Perlman stated that “regulations are a bottom line, not a ceiling.”
The company said that Gemini Earn, which was launched in February, has grown to approximately 100,000 customers and $2 billion in assets, with an overall interest rate of 7.4%.
More sophisticated traders also see the appeal of earning interest instead of trying to participate in the market. Taz, a cryptocurrency trader in West London, said: “I was able to sell quite a few chips at the top, so I moved the stables to a high-yield farm that was enough for me to live a life.”
He said that the stable currency income farm that generates 25% interest is the core of his income, but he also made some riskier bets. The most recent investment of US$10,000 lost half of its value in two weeks, while generating daily interest worth US$150. He believes that prices will eventually rise.
Although still attractive, available prices have fallen along with market prices. In an extreme case, a farm advertised on the production agriculture website PancakeSwap in May offered bettors willing to place bets with the website’s own coins (called Cake) at an annual interest rate of 101,513%. In contrast, according to Ice Data Indices, US corporate bonds with a rating of three Cs or below — considered highly speculative investments — yielded 6.4%.
However, releasing any paper gains from these incredible returns usually involves converting niche tokens back to traditional currencies, which can incur high fees. When income farms become more popular, their available interest rates tend to fall because the agreement does not need to provide incentives to attract liquidity. As the demand for borrowing cryptocurrencies has fallen, interest rates on large platforms have also fallen.
Major borrowers include crypto hedge funds that participate in leveraged transactions, as well as market makers or exchanges that need working capital or want to borrow money from their trading clients.
“There are a lot of bull market-related activities in the credit market,” said Asen Kostadinov, director of strategy for digital investment platform Copper.
For many lenders, the balance continues to expand as the market and lending activity decrease. For example, Celsius, a cryptocurrency lender, said that assets on its platform have increased from $10 billion in March to $16 billion.
Customers usually have little understanding of what the platform does with their money. “One of the current problems in the industry is the lack of transparency in lending,” said Ryan McCall, CEO of Zerocap, a crypto investment manager with wealthy clients.
“As this book develops, platforms must provide loans to counterparties who may be considered riskier,” he added.
Coinbase launched a US product earlier this week, offering a 4% yield on a stable currency pegged to the US dollar. The exchange said that the higher yields offered elsewhere may be because the assets were “lent to an unidentified third party”.
Although many platforms retain high levels of collateral, opaque loans to highly volatile assets have raised serious concerns about risks in the industry.
“There are many risks to interconnectivity. An executive of an encryption trading company said that this is the same counterparty borrowing from each other.
“The market’s really sharp negative trend may trigger a domino effect.” The executive said that some higher-risk loans look like “an accident waiting to happen.”