The crypto industry is constantly growing. New applications and businesses are created continuously with a goal to deliver an alternative solution for the current unfunctional monetary system. But one of the flaws in the core notion of cryptocurrencies when compared to fiat currencies is the inability of the holder to earn interest on the owned coins.
Earn Interest on Crypto (Bitcoin) – How Does It Work?
Interest rates are one of the most important aspects of the monetary financial model, as we know it. They represent the amount a lender charges for lending any asset but more importantly, interest rates are being used by governments, central banks, and private corporations as a key mechanism to encourage or hold consumer spending in times of growth and recession.
But Satoshi Nakamoto’s goal was to invent a new form of money without any reference to interest rates. Perhaps Nakamoto knew that crypto lending platforms will rise once Bitcoin gains popularity. Regardless, crypto lending and borrowing platforms have the potential to draw in new investors and encourage a financial activity in a market that was, so far, limited to ‘being a bubble or not’.
Interest rates can be applied to any product. As a matter of fact, most of us pay interest on products and services without knowing it (wheat, corn, oil, etc). The basic idea of interest rates can easily be integrated into the cryptocurrency market. When a crypto lander platform buys cryptocurrency from the user, it usually lends the crypto asset to large institutions and crypto applications that are looking for alternative ways to obtain cryptos.
A crucial factor is the range of interest rates offered by lending platforms on cryptocurrencies. Over time, companies with high-interest rates will go out of business, as well as other companies with low-interest rates. This means that only will survive, similarly to the centralized banking industry.
How Do You Get Interest Rate on You Crypto (Bitcoin)?
Interest rates on cryptocurrencies can be quite high – the goal is to incentivize users to loan out their crypto assets and eventually, make a full crypto-economic activity. Obviously, this has come as a solution to one of the main drawbacks of cryptocurrencies, which is the loss of holding these assets due to a lack of interest rates. But now, users can earn a high return by lending their assets instead of storing them in a personal wallet or device.
Fundamentally, credit and lending are crucial for the development of healthy financial markets. The question is how rates are determined in the crypto world, and can it be a sustainable and stable market. Currently, cryptocurrencies and bitcoin are still the less preferred asset to hold, and therefore, many investors that hold cryptocurrencies will prefer offering their crypto assets and receive cash in the form of fiat currencies.
BlockFi, for example, is one of the most well-known platforms in the market that offers users to earn monthly interest payments on your crypto assets. Simply put, BlockFi’s interest account makes it possible for those who hold cryptocurrencies to get a fixed yearly rate by lending it to BlockFi at a fixed yearly rate. In fact, the BlockFi Interest Account (BIA) is the first and only interest-earning crypto account that enables you to make a monthly return as well as to trade different cryptocurrencies.
Generally, BlockFi provides two main services – Crypto interest accounts and crypto-backed loans. As to the selection of crypto assets, BlockFi supports Bitcoin, Litecoin, and Ethereum as well as stable coins such as GUSD or USDC.
What’s the Risk?
According to BlockFi, users can earn up to 8.6% annually when lending their cryptocurrency. As you already probably know, that is a very attractive yearly yield these days which is almost impossible to get in any other financial instrument that comes with a fixed income payment. So, what’s the catch? What’s the risk?
At the fundamental level, BlockFi makes money by borrowing capital at a certain rate and lends it a higher rate. To earn interest, you’ll have to deposit at least 0.5 BTC or 25 ETH. Users can earn up to 5.1% annually if depositing under 5 Bitcoins. BlockFi, then, lends the capital to other clients at higher rates.
The primary risk, in our opinion, is that everyone defaults on their loans. In that case, BlockFi could not repay their loans, though they have mentioned having a strict risk management and credit analysis process. Nevertheless, reviews indicate that it is a legit company that pays attractive rates.
Simply put, BlockFi is insured by FDIC or SIPC. Further, its custodian is Gemini, the same crypto exchange that was created by the famous Winklevoss twins and is regulated by the New York Department of Financial Services. They also raised 60 million in funding and are based in the US.
BlockFi June Signup Bonus
New account holders who deposit at least $100 worth of any supported cryptocurrency during the month of June, and do not initiate any withdrawals during this period will receive a bonus of $10 in BTC in their next interest payment.