*or lose it all

One of the hottest segments of the emerging crypto economy in 2019 has come to be known as DeFi. Short for “Decentralized Finance”, DeFi promises to revolutionize traditional finance, starting with the most basic banking activities: deposits and lending. A company called BlockFi wants to be a major player in DeFi. Like traditional banks, BlockFi pays interest on deposits and charges interest on loans. What makes BlockFi interesting to me is that the interest rate they pay on deposits is much higher than the interest rate I could earn on cash in a savings account at a traditional bank. So, I hold cash with BlockFi in the form of a USD stablecoin, and earn 8.6% APY on it until I’m ready to withdraw and spend it. BlockFi also pays interest on deposits of other crypto assets, such as Bitcoin and Ether. But today we’ll focus on stablecoin deposits.

What’s a stablecoin? A stablecoin is a digital token recorded on a blockchain, kind of like Bitcoin (BTC). But whereas the exchange rate between BTC and USD fluctuates constantly, the exchange rate between stablecoins and their associated fiat (government-issued) currency remains constant. The stablecoin I reference in this article is USD Coin (USDC), and it’s pegged to the US Dollar. Technically, the USDC/USD exchange rate can fluctuate. But in practice, the variance from $1-to-1 USDC rarely exceeds 1%. And many crypto companies offer a $1-to-1 guarantee on USD/USD-pegged-stablecoin deposits and withdrawals.

Here’s what I do to earn 8.6% on my cash:

  1. Use Coinbase to buy 1000 USDC tokens for $1000. Don’t have a Coinbase account? Open a free account here and we’ll both get $10 worth of free BTC.
  2. Send 1000 USDC from your Coinbase account to your BlockFi USDC deposit address. Don’t have a BlockFi account? Open a free account here.
  3. Watch as BlockFi credits your account with $6.90 at the end of the month, the equivalent of 8.6% annually with monthly compounding.
  4. When you want to cash out, you can send USDC back to your Coinbase account and withdraw it as $USD to your bank account, or even borrow against your USDC at BlockFi while it continues to earn interest!

Obviously, 8.6% is a much higher return than you can earn on cash deposits at a traditional bank. So what’s the catch? Well for one, the rate is subject to change and may drop over time. But more importantly, BlockFi deposits are not protected by FDIC insurance, which promises to cover US bank deposits up to $250k. Although they’re not a bank, BlockFi claims to work within US financial regulations, and to store customer assets with one of the leading crypto custodians, Gemini, which recently launched their own captive insurance company to provide their clients $200M of coverage. But I haven’t been able to determine when or if US regulations or custodian guarantees would come to my aid in the event of a loss. So I’ve simply accepted the risk that BlockFi could go bust, get hacked, or run off with my money, and I could lose my entire investment. Ultimately, I’m betting that the chances of that happening during the time I hold funds there is less – way less – than 8.6% per year.

So, is the risk of a total loss worth an 8.6% annual return? For me, the answer is yes, because I’m pretty risk tolerant, and because I get value from conducting the experiment and furthering my knowledge of crypto markets and products. Remember, I’m not a financial professional and this is not investing advice. But if you want to get your hands dirty with crypto without exposing yourself to the price fluctuations of Bitcoin or other cryptocurrencies, consider throwing some USDC at BlockFi. You just might get more out than you put in.

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