There is a lot of interest in crypto banks like Nexo and Blockfi. Savings accounts on the high street, where interest rates are sub-1%, can offer an annual percentage yield of up to 12%. There are some important things you need to know before you start saving in crypto. You must understand what interest is being offered by these banks.
Many crypto banks do not offer customers the option to save in stablecoins, such as tether or USDC, which they trade on a one for another basis with the US dollar, aside from Nexo, which offers up to 12% interest on pounds, US dollars, and euros.
Stablecoins are where they charge high the most, such as Tether and USDC, where BlockFi pays 8.6% on USDC, 9.3% on Tether, and 5% on bitcoin and Nexo pays up to 12% on USDC and Tether but 8% on bitcoin. This means you could convert $1000 (£720) into USDC1000, hold it in a BlockFi account for one year, then withdraw $1,086.
You need to transfer your money into this form first since major crypto banks deal only in cryptocurrencies. You can do this through an exchange like Binance or Coinbase or through crypto banks that offer limited versions of this service. For example, anyone can send dollars to BlockFi, which will convert them into stablecoins known as Gemini USD, which has an 8.6% rate of interest.
A majority of crypto banks offer the option of converting your Gemini to bitcoins on their platform. Although there are no fees associated with this service, the rates aren’t the most competitive. According to BlockFi, its price may be 1% above the regular price when purchasing crypto. Investing in cryptocurrencies lowers interest rates as you hold them longer. For example, BlockFi only charges 5% on bitcoin deposits of up to 0.5 bitcoins. Once you deposit more, the rate drops to 2%, and finally to 0.5%.
Furthermore, users can boost their chances of enjoying top quality trades by embracing the right trading tools. Bit Index AI has enjoyed much popularity as a tool that can help you trade like a pro to achieve quality trades.
In addition to offering interest payments on their cryptocurrency, certain crypto banks offer the best rates. Nexo, for instance, offers 12% APR on USDC and Tether, but only for people who receive payments in Nexo tokens. Unlike stablecoins, Nexo tokens fluctuate in value. The interest rate for USDC and Tether payments is 10%. There is also no guarantee of interest rates. So, when you quote an annual rate, keep in mind that it could fluctuate anytime
Business Model
However, the rates are extremely high. So, what are the secrets of crypto banks? At a crypto bank, capital is lent out at a higher rate than the interest rate it pays its depositors. There are two ways that crypto banks protect themselves.
First, they lend out less than the amount they hold in deposits. Then, by requiring that borrowers place collateral on their loans. Calculating the required collateral needed for a loan involves calculating loan-to-value (LTV). So, when BlockFi reaches an 80% LTV, it has the right to liquidate collateral. The current rate for borrowing $5000 from BlockFi is BTC0.25at the value of $9448 at the time of writing.
If the value of bitcoin dropped to $6250, the bank would sell some of your collateral to raise the LTV.
Bottom Line
This type of business model can generate significant revenues in good times. Although regular banks could give high rates on savings, they tend to use some of those savings to make their rates more competitive.
It is not clear the direction crypto banks would take if borrowing dried up or there was either a sudden or prolonged crash in the market. A scenario such as these, however unlikely, would mean that your savings in crypto are not insured, unlike those in a high street bank.
Related