Crypto interest guide: updated

In light of the collapse of the crypto interest industry in November 2022, PROHASHING and author Steve Sokolowski are commencing litigation against multiple lenders and individuals discussed in these articles. These posts are outdated and will not be updated due to the ongoing legal actions. You should not rely on the information presented here. PROHASHING and the author are no longer able to respond to comments and support tickets regarding crypto interest companies.

 

I thought that it was worth a brief update to the Earning Interest on Cryptocurrencies guide.  I decided to create a new post, because the old post is obsolete beyond repair.  The circumstances have changed so dramatically that a fresh outlook is required.

There's a lot of information out there explaining what you should do during these high-stress times, but few posts explain why the market is in the situation it is currently in.


What's not safe

The current lending crisis is all about DeFi and tokens.  In particular, stETH and Terra are two "stablecoins" that have depegged from the value of the items that the tokens were purported to represent.  Celsius, 3 Arrows, and other insolvent firms made poor decisions about investing depositors' funds in these tokens.  They either didn't understand how the tokens worked, or understood how they worked and invested anyway.  I'm starting to agree with the Celsius solvency survey results that Celsius and 3 Arrow's managers engaged in criminal activity because they knew that these tokens were a risky bet and invested in them anyway without telling their depositors.

Another "token" that doesn't actually represent what it claims to represent is the Greyscale Bitcoin Investment Trust, in which BlockFi heavily invested.  This trust doesn't allow withdrawals, so a share is worth 35% less than the value of the bitcoins backing it.

Another type of unsafe situation is a firm that has frozen deposits but which is accepting withdrawals due to the SEC's actions.  Gary Gensler set up the perfect conditions for the current crisis by creating companies that can't accept any new deposits but can only issue withdrawals.  Ledn is a great company which is otherwise safe but can't be recommended because it is prohibited from accepting US deposits.  What did the commissioners think would happen to a bank that they will only allow to service withdrawals?

Finally, there are firms that are making investments in exchange for equity in companies that get involved in DeFi and tokens, or which could fail due to a chain reaction because that second company itself is invested in a company that is then invested in DeFi and tokens.  Therefore, if a company owns shares in cryptocurrency companies, or won't tell you whether it does, then it could end up becoming insolvent simply because the firm in which it invested had a great business model and lost all its deposits at Celsius.


What is safe

What remains safe in the current environment, as it has up until now, is lending to companies that provide secured loans.  Banks, for example, borrow unsecured money from depositors and make secured loans against houses and cars, so bank failures are rare.  In the case that the borrower stops making payments on the loan, the bank repossesses the collateral and sells it.

In the cryptocurrency industry, secured loans are even safer than a typical bank is in the legacy financial system, because the legacy bank loses a lot of money on lawyers and fees to sell a house it has repossessed.  When Genesis Trading margin calls a loan, it can sell the collateral immediately to its over-the-counter trading customers, or slowly liquidate it on other exchanges, without the expensive and time-consuming process of needing to pay lawyers or auction off the asset.


Who to lend to

The problem right now is that it's nearly impossible to tell which companies have gotten themselves involved in tokens, derivatives, and equity investing, and which are simply performing secured lending.  Any company that doesn't make a concrete promise that they are only doing secured lending could end up insolvent or subject to a bank run.

Right now, the only companies that have the simple banking business model for lending are:

• Gemini (which lends only to Genesis)
• Genesis

These companies have all been involved in tokens, stablecoins, and the like, and are vulnerable to runs:

• Crypto.com (which has its CRO token upon which everything rests)
• Ledn (which is perfectly fine otherwise, but can't accept deposits to prevent a bank run)
• BlockFi (which is significantly underwater from its GBTC holdings)
• Voyager (which already had a withdrawal limit and which had a "line of credit" extended to it)
• Any company which invested in Celsius or 3 Arrows and hasn't already written off the loss
• Nexo (which is not willing to comply with US securities laws and additionally has a token)
• Any company that stores its reserves in Tether, or which provides equity investments to companies that do the same

Furthermore, do not own stablecoins.  Sell Tether.  Don't buy stETH.  Redeem DeFi "wrapped" tokens like WBTC.  The only stablecoin I trust right now is USDC, because it has 100% of its funds in things the US government backs, like cash and T-bonds.


Interest rates

Even though I find it very unlikely that Genesis, or any of the companies that lend to Genesis, will fail, the interest rates that Gemini is offering on some coins are too low to justify the risk of lending to them in this environment.

If you want to lend Bitcoin Cash to Gemini at 5.33%, then that's a great rate and you should certainly do that.  The 1% Gemini is offering on bitcoins, however, is not commensurate with the risk.  For me (and probably for you too), that means that I would get 0.57% APY after taxes.  Even though the risk from Genesis is low, it's not lower than 1 in 200.


Conclusion

In conclusion, the only places you should lend to right now are those that make secured loans to other people - Gemini, or, if you have $10m, Genesis.  This is not the time to get involved in anything related to tokens.  Read between the lines and look at which companies need to accept "revolving credit" (i.e bailouts.)  Ditch most stablecoins.  Insist on reasonable interest rates, and if you can't get at least 2%, put the money in cold storage.

And please consider filling out the survey about crypto lending at https://s.surveyplanet.com/l18fwqrn; I'll be reviewing the results in my next post on June 25.  These results should reveal depositors' attitudes towards the lending services, which will make it easier for everyone to figure out which companies are most vulnerable to bank runs.