Are crypto banks safe for your savings?
Recently emerging crypto banks such as BlockFi and Nexo are attracting a lot of curiosity. Customers of these crypto banks can earn up to 12% on their savings more than any other savings accounts offered by any financial institution at all. But is it safe to transfer your hard-earned money to a crypto bank?
There are some facts that you need to know before putting all your money into a bank account. Let us start from the beginning. At first, you need to know on what basis these crypto banks are offering high-interest rates. Most crypto banks permit users to save in bitcoin, ethereum and stablecoins like Tether that can be traded one for one with US dollars. Only Nexo authorizes its users to save in dollars, pounds and euros, and all of these banks offer 12% interest rates on saving accounts depending on the currency you are saving in.
For example, those who save using stablecoins get the highest amount of interest rates, i.e. 12% on Tether and USDC and 8% interest rates for bitcoins. BlockFi offers a rate of 8.6% on USDC, 9.3% on Tether and only 5% on bitcoins. To put it simply, if you convert US 1000 dollars into USDC1000 and leave it in a BlockFi account for a year, you will get a total of US1086 dollars.
To deposit money in these banks, you will have to first convert your fiat Currency into either stablecoins or cryptocurrencies because most of these banks deal with cryptocurrencies. The exchanges can be done using different exchange platforms such as Coinbase or Binance. Some crypto banks also offer an exchange; in BlockFi, you can deposit US dollars, and they will convert the currency into Gemini USD (which is also offering an interest rate of 8.6%).
Also, if you save using cryptocurrencies, interest rates may significantly fall if you are in possession of huge amounts. For instance, BlockFi offers its customers 5% rates on Bitcoins. If the deposits are up to 0.5 bitcoin, more than 0.5 bitcoin holders will receive 2%, and ultimately, it comes down to 0.5%. Moreover, the crypto bank’s interest rates are not constant in nature and may fluctuate according to the market. However, they quote it as an annual rate, but it’s actually not.
The Business Model
The business model behind crypto banks is that they borrow capital at the interest rate they provide their customers and then lend it at a higher interest rate. For example, if BlockFi is lending its customers US 5000 dollars as collateral, he has to put around 0.25 bitcoins that values 12.565.15 USD. If the value of the bitcoin falls down to a significant amount, then BlockFi will have the right to liquidate some of your assets in order to return LTV (Loan-to-value) to a safe level. LTV is a calculation through which how much collateral is required to secure a particular loan amount is calculated.
Keeping the broad crypto market in mind, it is important to know about all the potential risks before creating a savings account to save crypto coins. If you are ready to hand over your digital currencies to earn some profits, then there is also the possibility of entirely losing your crypto coins. If you are ready to face the worst possible circumstances, you can keep your crypto coins to earn profits.
