This WSJ article is the first mainstream financial article that I’ve seen discuss the high interest rates paid on Bitcoin and stablecoin (cryptocurrency backed by a “stable” asset like the US dollar). I am (again) not a cryptocurrency expert, but it does seem appropriate to educate and warn other curious investors about the risks. Here’s my take:
- The price of Bitcoin can vary a lot. It probably went up or down by a hundred dollars in the time you took to read this sentence.
- Stablecoin prices tend to vary less because they promise to be backed by a stable asset. USDT (Tether) and USDC (USD Coin) are both currently trading exactly at US$1.00, so it appears that the market believes this claim. However, US dollar stablecoins are not affiliated with the US government or any central bank.
- Brokers/exchanges where you can buy and sell these cryptocurrencies are not backed by government insurance. They are businesses – some will end up worth billions, some will get bought by a bigger competitor, and some will probably fail (likely because they were hacked). Even though they might be called “savings” or “interest” accounts, no cryptocurrency is held in an FDIC-insured bank, or even an SIPC-insured brokerage account. They will promise to keep your crypto safe and pay interest, but it is possible they may not live up to their end of the deal, AKA “counterparty risk”. Not every exchange is equal.
- This potential risk is a big reason that they have to pay you 6% annual interest in your Bitcoin and/or 9% annual interest in your USDC stablecoin. They are lending out your assets and earning even more interest, because traditional banks won’t do so.
- The result is two separate risks – the risk of the price of crypto itself, and counterparty risk of the place holding your crypto.
In the end, I agree with this part of the article (even with the mocking tone):
If you’re a risk-taker who relishes the ride when an asset soars and can laugh off the losses when it crashes, then maybe you should consider letting a broker borrow your cryptocurrency at a generous rate.
After all, if you aren’t troubled by the extraordinary volatility of virtual money, you might as well earn some interest on it.
I did buy some crypto a few years ago as a purely speculative investment and to promote my own learning. We are talking less than 1% of net worth, but it has become a 5-figure amount. I was very skeptical at first, but now I am partial to the theory that either BTC is worth zero, or it will eventually be worth at least on par with the market cap of gold (roughly $200,000). I accept that both scenarios are possible.
I bought Bitcoin using the Voyager app ($25 bonus, publicly-traded with $3 Billion market cap) and also opened an account with BlockFi ($250 bonus, just completed $350m Series D at $3B valuation). Both of these companies are worth well over a billion dollars and gone though various rounds of funding, which isn’t bulletproof but it means that smarter people than me have vetted their security protocols and business practices.
BlockFi pays me 6% interest on up to 2 BTC (8.6% on USDC) and Voyager pays 6.25% interest on BTC (9% on USDC). I reinvest the interest so that I own a little bit more BTC each month. However, I fully accept that I am getting paid this interest and getting the convenience of buying BTC with a few taps in exchange for the potential risk that they will go bust while losing all my BTC. There are other options like hardware wallets, but I am don’t want the inconvenience or to worry about forgetting my bitcoin passwords for my relatively small investment.
Bottom line. Sorry, you can’t earn a 9% “safe” interest rate on your cryptocurrency, even if it is a US-dollar backed stablecoin. At a minimum, you still have counterparty risk. This is a business lending out your assets, charging interest, and giving you a cut. They can go bust, and not all exchanges are the same. Perform your own due diligence when picking a broker/exchange to buy from. I picked what I think are among the safest, but it’s still risky.
Even though the interest rates are quite low, I keep my “safe” cash in FDIC-insured bank accounts and similar.
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“convenience of buying BTC with a few taps in exchange for the potential risk that they will go bust while losing all my BTC”
A similar company last year was offering interest on cryptocurrency. The company is called Credearn. Since October of last year, my funds and the funds of others have been in limbo. Granted, it was not a large sum of money, but the value of one BTC was about $13,000 last October, and today, the value is almost at $60,000.
Remember, if you do not own the private key/wallet you keep your coins in, the assets are not yours.
Thanks for your comment, sorry to hear of your troubles with Cred. I view crypto as similar to banks before FDIC insurance. Back then, there were runs on banks because your money was only as safe as the specific bank holding your money. Many people simply kept their cash under their mattress (similar to keeping their own keys). Reading about Cred was a good exercise:
https://www.coindesk.com/bad-loans-bad-bets-bad-blood-how-crypto-lender-cred-really-went-bankrupt
From a quick read, they promised safety (of course), touted “many years of executive experience” (of course), but I didn’t see any significant venture capital funding or regulation by any state or country. Instead, it appears they were secretly taking bigger risks than simply lending and paying interest. Paypal has had hundreds of “former executives”. I like to see external people put up something valuable (hundreds of millions of their own money and reputation), as I’m otherwise flying rather blind as an average person. (There is a India-based fintech startup named CRED that did get venture capital, but is not a crypto company.)
Carlos, sorry to hear about your troubles. I am not familiar with CredEarn. I would caution readers of this blog to do your research and pick top companies only. These are multi-billion dollar companies, backed by industry leaders and venture capital, people who have credibility. Personally, I use the following:
crypto dot com earning 12% interest
BlockFi earned 8.6% interest, but a nice $275 new account promo made the rate of return above 12% annualized (wait for promo to open a new account, they frequently run them)
Celsius earning 10.5% interest, but a nice $120 promo made the rate of return above 12% annualized (they are running promotions all the time, so make sure to use promo codes)
How are the fees for Voyager and BlockFi? I was told by a friend who seems knowledgeable about crypto to use binance.us because it’s got the lowest fees. I’m currently using coinbase, and now realize their fees are insane so was planning on switching sometime in the near future. I hadn’t heard of any of these paying interest though, so this has given me something new to consider.
Brent, maybe I can give you advice. What fees are you talking about? Trading fees? Network fees? CoinBase Pro has the lowest trading fee of 0.5%. Don’t use CoinBase, use CoinBase Pro. It is the same company, same login, just lower fees.
Yes, I’m talking about trading fees. And while CoinBase Pro is 0.5%, Binance is 0.1%, so seems like CB Pro isn’t the lowest.
I did more research and found KuCoin. Now I am paying only 0.08% trading fee.
I just went with BlockFi, since I think them and Voyager pay the highest interest for the amount of BTC I have (under $5k).
Maybe you could talk about taxes on your crypto interest earnings. if you’re only holding small amount like a thousand dollar’s worth, it’s such a hassle unless your holding company kept track of your earning and your costs basis well. it’ll bit a nightmare to keep tracking of all those monthly lots of your crypto interest holdings.
so whats your thoughts on moving things here from coinbase? I dont see coinbase paying anything to me for crypto currency, while this seems free money if I move my assets here….