Retail investors are lining up for the latest twist in the never-ending crypto craze.
\nBlockFi, a fintech startup backed by billionaire Mike Novogratz\u2019s Galaxy Capital, began providing interest-bearing accounts this month that offer up to 6.2 percent in annualized returns paid in Bitcoin or Ether. Since a March 5 launch, they\u2019ve attracted at least 10,000 customers, 90 percent of whom are retail investors. The company has taken in over $35 million in deposits, with large accounts pulling the average balance up to about $40,000.00<\/p>\n
BlockFi\u2019s interest rate is set on a month-to-month basis and is based on a combination of rates BlockFi sees in the institutional cryptocurrency borrowing market, as well as a budget it set for customer acquisitions, Zac Prince, chief executive of New York-based BlockFi, said in an interview.<\/p>\n
\u201cWe expect the interest rate in the account to be higher in times when prices are falling, and lower when prices are rising because demand to borrow Bitcoin is partially driven by market sentiment,\u201d said Prince. \u201cWe are bullish on the cryptocurrency market and on Bitcoin long term,\u201d he said, which would ultimately result in lower interest rates.<\/p>\n
It turns out that investors might do fine just holding onto their coins right now rather than depositing their crypto assets with BlockFi. Bitcoin has rallied about 8.5 percent since December to around $4,000.<\/p>\n
The accounts have attracted push back in a world that already lacks expansive regulatory oversight and suffers from a\u00a0pandemic of scams<\/a>\u00a0and unanticipated meltdowns such as the recent shuttering of the digital-asset exchange Quadriga CX following the death of its founder. BlockFi\u2019s critics\u00a0point\u00a0<\/a>to the terms and conditions that state the company can determine the interest rate each month at its sole discretion.<\/p>\n \u201cA superficial review of their splash page and their terms and conditions shows that their advertising is not necessarily what they\u2019re guaranteeing,\u201d said David Silver, founder of the Silver Miller law firm in Coral Springs, Florida. \u201cAs a securities fraud lawyer, my job is to protect people who are misled into misrepresented investments; and it\u2019s understandable why people would be confused if they didn\u2019t receive their 6.2 percent because BlockFi\u2019s advertising makes it seem like that\u2019s a guaranteed rate of return.\u201d<\/strong><\/p>\n BlockFi has been open about this and the rate will \u201cdefinitely\u201d change in the future, said Prince. \u201cThe way that it works is we will announce rate changes in advance of the change happening and they won\u2019t go into effect immediately,\u201d he said. \u201cWe didn\u2019t launch with a 6 percent rate with the intention of changing it one month later and pulling a big gotcha on everybody. That would be really bad business.\u201d<\/p>\n Clients can deposit either Bitcoin or Ether (the only coins currently accepted) and the company lends the funds to crypto investors for arbitrage, short-selling or market-making trades at rates ranging as high as 12 percent. BlockFi\u2019s interest rate is nearly three and a half times higher than the next-nearest rate of 2.5 percent from Customers Bank<\/a> online savings accounts or three and a half times times higher than that offered on 120-month JPMorgan Chase certificates of deposit<\/a>.<\/p>\n But while deposits held by traditional banks are insured<\/a> by the federal government in case of default, BlockFi\u2019s accounts offer little downside protection. FDIC insurance isn\u2019t available in the crypto world. Instead, Tyler and Cameron Winklevoss\u2019s Gemini Capital is providing custody and insurance against cyber theft, said Prince.<\/p>\n BlockFi\u2019s also at the mercy of an unstable crypto market, which saw Bitcoin — its largest cryptocurrency<\/a> — lose more than 70 percent of its value last year. And the interest rates paid out are only as valuable as the price of Bitcoin or Ether at the time of payout.<\/p>\n \u201cIt struck me that it could be misconstrued by unsophisticated retail investors,\u201d said Tim Swanson, founder and head of research at PostOak Labs. \u201cIn order to use some of this cryptocurrency technology, you have to be a little bit tech savvy.\u201d<\/p>\n But BlockFi says risks related to its products are obvious — and have been part of the crypto market for a while. \u201cIt\u2019s systemic risks,\u201d like failure in the Bitcoin blockchain that could push prices down an order of magnitude more than it previously has, said Prince. \u201cIn our terms and conditions<\/a>, we have thorough, bold print sections on risk disclosures.\u201d<\/p>\n BlockFi also offers crypto-backed loans with rates ranging between 4.5 percent to 11.25 percent, and eventually hopes to offer an array of services similar to what other fintech platforms — like SoFi — offer.<\/p>\n \u201cThey started with a core market segment, which for them was HENRYs — high earners, not rich yet,\u201d said Prince. \u201cThey delivered one product to that market segment — and the one product was student loan refi.\u201d Since then, SoFi\u2019s diversified its product suite to include mortgages, stock trading and savings accounts, among other things. \u201cWe think of ourselves as a company kind of like that.\u201d<\/p>\n See the full article:<\/p>\nObvious Risks<\/h3>\n