The ability to earn interest rates of up to 20% a year may appear astonishing to those new to cryptos since rates like these are considered the high mark of excellence among equity fund managers.
Wealth managers and family office administrators are starting to pay serious attention to the investment opportunities in cryptos, says Jon Ovadia, CEO of crypto financial company Ovex.
“It makes sense that wealth managers would be looking at cryptos, especially given an environment in which cash earns very little or even zero interest from the banks,” he says.
A growing list of corporations in the US are now moving a percentage of their cash into bitcoin and other cryptos as a hedge against fiat currency depreciation, though the trend has yet to gain serious traction in SA.
Wealth managers are less timorous and are being forced by clients to explore opportunities in cryptos.
Ovadia says the ability to earn interest rates as high as 20% a year is the result of cryptos’ unique characteristics.
“Cryptos are more volatile than traditional investments, and for that borrowers are rewarded with higher interest rates. Another more important reason is the absence of intermediaries in cryptos. The fact that you can earn up to 20% in a crypto interest account with Ovex, which is way above what you would earn from a bank, is in large part due to the fact that there are no intermediaries in cryptos.”
Perhaps the best way to explain this is to understand that crypto sentiment is generally net bullish, with 60% of volume on the US’s largest crypto exchange Coinbase being buys, which in turn creates borrowing demand from traders seeking to leverage their positions.
Demand for borrowing explains the high levels of interest rates that can be earned from cryptos, but that is only part of the reason.
Cryptos are more volatile and riskier than cash, and that attracts an interest rate premium. Anyone prepared to lend money in this market is going to demand an interest rate commensurate with risk.
The astonishing emergence of decentralised finance or DeFi over the last year, with more than $60 billion in funds under ‘lock-up’ in just the last 12 months, is a trend that is only likely to accelerate.
As explained in this article, DeFi allows you to lend, borrow and earn interest without an intermediary, and outside the traditional banking sector. To borrow, you post collateral in the form of crypto on a decentralised exchange like Aave or Compound, and within minutes you have your loan with a loan-to-value ratio of 50-70%. All this is done by way of smart contracts, which are computer codes designed to execute without human intervention. In practical terms, should the value of your collateral drop by about a third, the loan will be liquidated, and a penalty interest rate applied and any surplus returned to the borrower.
Ovadia explains that Ovex is able to offer exceptional interest rates of up to 20% (depending on the amount invested) by utilising some of the mechanisms of DeFi.
“One way we are able to generate income is by staking cryptos, which is a way of putting cryptos to work in a way that generates interest. The other way we generate income is through arbitraging the price differences in bitcoin between the futures and spot markets. We are able to combine these various DeFi mechanisms to create relatively low-risk returns.”
Ovadia adds that the absence of intermediaries in smart contracts allows for lenders to earn higher interest rates than available from the banks. In a traditional lending environment, the borrower applies to the bank for a loan. The borrower’s creditworthiness is assessed and they may be asked to post collateral in the form of a house or cash, or some other asset.
This can take weeks or even months and is a key shortcoming in traditional finance that DeFi developers set out to plug. They did this by making it possible to borrow money without having to submit your ID, your name or your balance sheet. All that is required is collateral, usually in the form of bitcoin or ether (ETH), the currency of the Ethereum network. The terms of the loan and the conditions of repayment are embedded into the smart contract, which is in effect a piece of computer code.
You can get more information on the Ovex interest account here.
Brought to you by Ovex.
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