The Crypto Bank
Earn Passive Income – USD via Crypto Platforms
Alright, I’m gonna get straight to the point – This article is gonna focus on earning interest on your money via Crypto Exchange (estimated 8% P.A.).
I am not gonna talk about which cryptocurrencies is the best to buy in 2020 or why you should invest in cryptocurrencies.
This article is suitable for the following types of people…
- An investor looking to diversify from a traditional financial investment portfolio
- Beginners who wants a to have a foothold in crypto-investments with minimum risk and stable return
How do Banks give you interest on your Savings Account?
Before we get into the details, let’s ask ourselves this – why do we keep our money with the Banks instead of hiding them under our mattress?
Security reasons? Accessibility? To earn interest? The list goes on, but I dare say most of us do it to earn interest from the Banks. So, how and why does the bank pay you interest?
Interest Income
When we place money in the bank, we are essentially lending the bank money.
The bank will then lend the money to borrowers, where it receives interest for the loan, and interest will also be paid to the deposit account holders (us!).
This is termed as interest income.
Extracted from Seedly.
The Crypto Bank – How it works?
I have coined the term Crypto Banks for these platforms out there. Why? The term suggests that these platforms, similar to traditional banks, also allow you to keep your money with them and earn an interest on them. Moving forward, these are the definitions of some terms that will be commonly used in this article. This is solely to enable a common understanding of terms relative to this article.
- Broker – A platform that allows you to buy or sell cryptocurrencies with fiat
- Exchange – A platform where cryptocurrencies are traded
- Margin Trading – A method of trading cryptocurrencies using funds provided by the lenders
- Margin Funding – A method of providing funding to traders
*The above terms are explained relative to this article only in a Crypto context.
⛔ ⛔ ⛔ WHOA, WHOA, WHOA!! STOP RIGHT THERE! ⛔ ⛔ ⛔
IF I HAVE BEEN FOLLOWING CORRECTLY, YOU ARE TELLING ME TO LEND MONEY TO CRYPTO TRADERS? THAT’S INSANE! WHAT IF THEY LOSE ALL MY MONEY!?
Yes, the exchange allows you to earn an interest on your money. How? Similar to traditional banks, they loan it out to borrowers (Traders) Do not be too concern over these traders not being able to return your money as they will be forced to liquidate their account to prevent further losses. To further understand the process, you will need to understand how Margin Trading works.
Margin Trading, Margin Funding, Liquidation
This is easier explained with an example.
So let’s say John has $100 and wants to open a 5x leverage to purchase 5 of Bitcoins (BTC) at the rate of $100/BTC. In this case, John is opening a Margin Trading Position with a 5x leverage. He would then need a Margin Funding from lenders of $400.
In a case where the price of BTC falls below $80/BTC, John’s position will fall below $400. But that will never happen because he will be force-liquidated even before that. Force-liquidation, simply means he will be forced to close his position and selling his 5 BTC so that he can return the lenders $400 and the accrued interest rates. Hence, the force-liquidation amount will be slightly above $400 to ensure that the trade can pay you back everything.
The above is a simplified example, you can read more about Margin Trading, Margin Funding and Liquidation here.
Rates, Returns & Risks
Not convinced? Let’s do another calculation.
Interest is calculated based on whatever amount you choose to offer as well as the duration of that offer. It is important to note that the platform charges a 15% fee. Interest is paid daily at 0930H Singapore Time.
Daily Interest earning = (amount*(rate*(seconds offered/seconds in a day)))*0.85
The minimum loan out term is 2 days, however, a trader might choose to close his position and return the loan amount in advance. Interest rates range between 0.02% per day to 0.10% in a week. Whether a trader decides to take your loan is determined by demand and supply. A trader would simply choose the loan with the lowest interest rate. There’s also an auto-renew function so that if your loan expires in the middle of the night, it will offer the remaining USD you have for loaning out.
To get a better perspective on the returns – In a year, the original amount of $3000 SGD, at 10% p.a. return rate will approximately get you an interest amount of $314 SGD 💰.
10% p.a. is derived from 0.0274% compounded daily (not including fees). – See resource section.
Below is an example
For instance, if you have an active 10,000 USD offer at 0.06%, you would, therefore, earn 6.00 USD per day.
Let’s assume that the funding was offered for exactly 12 hours which earns you 3 USD. On top of the 3 USD, a 15% fee is imposed (0.45 USD) by Bitfinex, hence your final earnings would be 2.55 USD instead.
My Returns
Below are my returns, I will be updating the chart weekly.
Risk ❗
Below are some key some considerations before proceeding
(Rank from most likely to unlikely)
- USD/SGD Exchange Rate – Remember that everything on the platform is calculated in USD. Currently, the exchange rate is at 1 USD = 1.42 SGD, lets say the USD weakens against the SGD and the exchange rates become 1 USD = 1.32 SGD, you will lose 7% of your principal and interest if you choose to cash out at that point of time.
- The Exchange is hacked – Hacks on crypto platforms are possible but remember, hackers only go for cryptocurrencies that can be sold back onto the market. Therefore, hacking the margin funding portion of the platform will not make much sense as they simply do not benefit from “borrowed” money. Furthermore, most platforms can simply reverse such hacks.
- Extreme Market Crashes – This has never happened before, but in an increasingly volatile market, forced liquidations might not be able to keep up with the volume.
- The Exchange closes down – It is unlikely that the platforms will cease operations due to international regulations.
- Singapore bans cryptocurrencies – Given the support by the Government for Facebook’s Libra(what country is this), I would say it’s unlikely unless it could largely benefit Singapore by banning crypto.
Despite the aforementioned risks, I personally think Point 1 is of extreme importance.
You can read more about the risk associated here.
Cashing Out 💸
You might be concerned over your money’s liquidity on the platform. Assuming, your laptop decides to die on you and you need to replace it as soon as possible. But you have just renewed a loan term for 2 days and your money is locked (Being loaned out). What now?
- Loan Period – 2 days (varies)
- Purchase a cryptocurrency on the Exchange Platform – 1 min
- Moving it to a Broker Platform Wallet – 2 to 10mins (depending what u bought)
- Selling it on the Broker Platform for fiat – 1 min
- Spending it via MCO VISA Card – Instant
- OR moving it to a Bank via Xfers – 1 to 3 working days
This can take up to 5 days depending on the situation. To me, this seems only fair.
My 2 Cents
All in all, the platform provides Margin Funding services which allow you to earn you interest on your money, similar to how a bank ‘safe keeps’ your money for you and pays you interest.
How much should I put into this Crypto Bank then? I would say nothing more than $3,000 SGD regardless of your portfolio size. This is due to the withdrawal limit on Xfers. As you can see above, there are quite a few possible risk associate with it, so I would draw a line even though the interest rates are considered above average.
⚠️ DISCLAIMER ⚠️
I am not a registered financial advisor. All above content, investment and/or financial opinions expressed on this blog are from research and personal experience and are intended as informational purpose only.
It is important for you to do your own analysis before making any investment based on your personal circumstances. I will not be liable for your losses.
Getting Started
Resources & References
Returns Calculator (Excel) – Excel Sheet to Calculate your Returns
Periodic Interest Rate Calculator – Convert Yearly Interest to Daily Interest
Bitfinex Margin Funding – Details about Margin Funding
Trivia
Well as everyone knows, COVID-19 is a pain in the ass.
The US has a $2 trillion U.S. stimulus package as an emergency relief bill to help the country cope with the crisis.
I shall not go into details, how things affect each other, but in summary, interest rates everywhere are dropping like grapes 🍇.
Banks everywhere are revising their interest rate. Even the Standard Charted Jumpstart is not spared. Considered as the best Saving Account for students, its interest rate has dropped from 2% P.A. to 1% P.A. starting 01 July 2020.
Welp, I guess putting money into The Crypto Bank may be a good decision after all.
Questions
If you have any questions just drop me a message and I will try my best to explain it to you.