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Encrypted currency management: risk is too big to gain compensation
In the bear market, investors in the encryption market hold money are also a bit of a dilemma. Short selling is afraid of market rebound. If the currency is not operated, it will lose investment income. In this sentiment, the financial market for cryptocurrencies has ushered in rapid development. Many encryption investment companies or wallets have launched financial services to provide certain interest for investors' savings. BlockFi has launched a cryptocurrency compound interest savings account with an annual interest rate of 6%. So what are these financial services, the value is not worth buying?
Ari Paul, managing partner of BlockTower Capital, expressed his views on Twitter today. he thinks,The growth of the crypto loan market is great for the ecosystem, but the risks faced by current investors are very large, and the current yield is too low to compensate investors for the risks.
Currently, there are two basic modes of encryption and financial services, namelyHostingwithUnmanaged. Most are hosted, which means that a third party will hold the cryptocurrency for you. This will bring the risk of counterparty.
What is the reasonable return for lending Bitcoin? Is the return of 6% reasonable? Or should it be 15%? It all depends on the counterparty risk. You won't make a profit by lending BTC. You make money because you borrow money for a specific counterparty like BlockFi.
So, how much interest rate is reasonable? US junk bonds are usually 4-6% higher than government bond rates. For high-risk start-ups, unsecured loans are typically 15-25% higher than government bond yields.
Short-term Treasury yields are currently 2.5%, so we should seek a yield of more than 22% when lending BTC to start-ups.This superficial analysis may be unfair to BlockFi, and many people think that Blockfi's lending is not a purely unsecured loan.
Blockfi said on their website that they "usually borrow cryptocurrencies based on overcollateral terms." The details are important here. If a particular lender can legally own the collateral during the loan period, these borrowings may be considered a mortgage. But Blockfi's borrowing may not be.
Ari Paul said:
“If you don’t have the right to legally own a particular collateral as a lender, then you are just the creditor of the company, you may not even be a senior creditor (not sure). So lending on such a platform is similar to an encryption startup asking you to provide The loan also gives you some interest on the loan and promises to keep a large sum of cash on behalf of their general obligation to the investor."
Unmanaged solutions are very different from hosting. You may not have a counterparty risk,Instead, you will be affected by some sort of liquidation risk and agreement risk. If the market gap is reduced, the gains you get from clearing collateral may not be enough to get you back.
In addition, Ari Paul believes that the loan platform itself is at risk of software vulnerabilities. He says:
“There are serious software vulnerabilities in using things like multisig solutions on loan platforms. How serious is it? Ask Parity, they are undoubtedly experts in Ethereum smart contracts, but they are in the simplest multiple smart contracts twice. Lost huge amounts of money."
In short, the growth of the crypto loan market is very good for the ecosystem, but the current risk faced by investors is very large, and the current rate of return is too low to compensate investors for the risks.
Editor in charge: Robot RF13015
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