- New regulated Bitcoin deposit product now offered by Gemini Trust
- Higher yield for Bitcoin deposits comes at higher risk, with every deposit essentially a long bet on the cryptocurrency and without deposit insurance
One of the biggest criticisms leveled against Bitcoin is that in generates no yield – and to steal a quote from a famous investor who leveled the same criticism at gold – “it just sits there and stares at you.”
In an era of near-zero interest rates, a new crop of financial products revolving around Bitcoin and other cryptocurrencies are offering annual rates of return as high as 12%.
Those familiar with the decentralized finance or DeFi bubble from last summer will yawn at the yields as in those heady days, deposits in cryptocurrencies were generating an unsustainable 5-digit annualized percentage yield.
But just as trees do not grow to the sky, there’s no such thing as money for nothing and thankfully yields have come down to more reasonable levels.
As competition between cryptocurrency exchanges heats up, cryptocurrency incentives have been rising again for depositors even as Bitcoin’s seven-fold surge since last March has seen more mainstream institutions and companies flooding into cryptocurrencies like never before.
Yesterday, Gemini Trust, a cryptocurrency exchange founded by the billionaire Winklevoss twins of Facebook (+1.94%) infamy, became the latest to offer interest rates ranging from 1.54% for Balancer to 7.4% for Filecoin, with Bitcoin deposits generating 3.05%.
The first of its kind account available across all fifty states of the U.S., the product currently isn’t available overseas.
The catch though is that the yields are paid for in the cryptocurrency of deposit, making depositors naturally long on any digital asset deposited.
And while the Gemini Earn account looks and acts a lot like a typical savings account – paying an adjustable interest rate on deposits, with accountholders able to withdraw their currency at any time with no fees or penalties, there’s no equivalent of deposit insurance should the account provider fail.
Unlike dollar deposits, where the U.S. Federal Reserve sets benchmark interest rates in accordance with economic outlook, Gemini Trust and other deposit takers set their own interest rates based on internal supply and demand analysis.
These automated market makers then help to generate the interest yield on those deposits.
But DeFi platforms like Compound and the myriad other decentralized exchanges are far more complex to navigate and require interaction with Metamask, which most cryptocurrency initiates may not be entirely comfortable with.
For that reason, Gemini Trust’s plug-and-play solution may find some audience among those who own cryptocurrency but don’t necessarily want to be actively involved in the management of it.
With more institutional investors piling into the cryptocurrency markets though, demand for borrowing Bitcoin and other digital assets is surging and hedge funds, family offices and other investors, are borrowing cryptocurrencies to structure complex trades largely because it’s easier to borrow these assets then to buy and custody them.