Crypto lending for income is growing in popularity
Interest rates promoted on crypto lending platforms are annualized but they are not fixed over a specified period of time. Prices may change frequently.
The risks are numerous. There is a risk of a collapse in the price of the loaned crypto and a danger associated with the lending platform itself.
If a foreign-based platform is hacked or suddenly goes missing, investors have no recourse.
It is also common for crypto to have price fluctuations of more than 10% in a single day, which can be confusing, especially for investors looking for yield.
Hema Raman, Crypto Assets Coordinator at the Australian Securities and Investments Commission, says “crypto assets are highly speculative investments” and “technologically complex, globally and online.”
“These characteristics make it very difficult to distinguish between legitimate businesses and unscrupulous operators,” and there is always the risk of being scammed, Raman says.
Chris Brycki, founder of Stockspot, an online investment advisor and fund manager, says people shouldn’t think of crypto yield platforms as depositing money into an Australian bank.
“As with any investment, there is a fundamental relationship between risk and return and, if you get rates much higher than you can get with money in the bank, there must be risk.” , explains Brycki.
One way to reduce risk is for an investor to first convert their crypto into “stablecoins”, the value of which is usually tied to the US dollar. The most widely used of these is Tether.
Stablecoins are backed by real currencies which are held on deposit with financial institutions.
If all goes as planned, the investor receives a higher interest rate than he could get elsewhere, with relative stability of his loaned crypto.
However, the use of stable coins still does not guarantee that investors will not lose their money.
There was a spectacular run on US crypto lender Iron Finance in June. It was offering an annualized interest rate of over 200% on its Iron Titanium token which was built on a “stable algorithmic ecosystem”.
However, a series of large investors wanted their money back simultaneously, which led to what has been described as the world’s first large-scale crypto-bank.
There was not enough money to repay investors and the value of the token collapsed.
Fred Schebesta, co-founder of Australian financial comparison site Finder, says he is developing “Finder Earn,” which will allow investors to earn interest on their crypto assets.
The product is expected to be added to the Finder app by the end of October. The company also recently added bitcoin trading to its app.
Other major Australian crypto players, such as Swyftx, are also looking at how they can pay interest on crypto assets.