How a new generation of online banking works

Profitability from 8 to 12% per annum on a deposit in US dollars? With regular interest and the ability to close the deposit at any time? Sounds loud and too good. But it is precisely these conditions that investors are offered by a new category of online banks, which has developed a modern solution in the field of peer-to-peer lending.

Note:

The content of this article is subjective and is not an investment recommendation. It should be taken solely for educational and educational purposes. The author of the article does not work in any of the companies that are mentioned in the article.

A time of record high prices The

question of competent and promising investment of accumulated funds rarely loses its relevance. Obviously, in different regimes of the state of affairs in the economy and on the securities market, the “right” decisions look different. The word “right” is in quotation marks, because it is rarely possible to answer which investments will bring the maximum return. As Warren Buffett likes to repeat in his interviews, you must be able to wait for the right moment and invest in promising assets when the price becomes profitable.

What economic regime do we have today? If you look at the American stock market in the form of the key index SP500 - for the last ten years it has been continuously and almost monotonously growing upward and regularly updating historical highs. The value of shares of a large number of key companies, the main global economy is at the highest values ​​in the history of observations.



How long will such growth continue when there will be a global correction of the index, no one knows what its size and duration will be. The first timid talk about the inevitability and the approach of a new economic crisis began to sound in the United States back in 2015. However, no major crisis has happened since then, and the American economy (SP500), on the contrary, has grown dynamically one and a half times over the past 5 years.

However, in recent years, many investors are increasingly asking themselves the question: is it worth buying assets that have grown without any correction for several years and which are currently at historic highs? Wouldn’t it be more appropriate to follow Warren Buffett’s advice and wait for a global price drop?

In this regard, a popular strategy is a gradual increase in the share of liquid currency in your investment portfolio in order to be able to make necessary asset purchases at a discount relative to the current price level in the event of a price reduction (in the stock market or, for example, in the real estate market).

On the other hand, the idea of ​​storing part of the portfolio in foreign currency (for example, in US dollars) has both pros and cons. The advantages include not only the potential to purchase various assets at a discount, which we mentioned above, but also the relatively low risk of foreign currency investments (such as bank deposits). The minuses, of course, include low yield on foreign currency deposits (rarely exceeding a modest 2% per annum for US dollars), potentially high lost profits and inevitable inflation, which slowly reduces the real purchasing power of the currency.

Not so long ago, a new financial instrument appeared on the foreign exchange investment market, which balances profitability and risk in a new way and at the same time preserves the liquidity of the foreign currency deposit, which can be very useful in the case of a global correction of prices for assets with overheated value. This tool will be discussed today.

New type of foreign currency deposit

What does a traditional bank earn? There are many ways, but one of the most common is the commission of an intermediary between depositors (investors) and borrowers. Moreover, this commission can be extremely high. For example, in the United States, banks accept deposits from investors at a rate of 1-2% per annum and lend money to credit card users at a rate of 20-25% per annum. The bank leaves the difference in its accounts as a profit. A conditional pledge in this type of consumer loans is the borrower's credit rating, that is, a virtual assessment of its solvency. The bank usually does not require any real loan collateral (with the exception of financial responsibility) from the user of the credit card.

It is easy to see that this classic banking secured lending scheme has a fairly high margin. Therefore, it is not surprising that new platforms have appeared on the financial market that are ready to reduce the size of their commission, which means offering more favorable conditions to both investors and borrowers. Their goal is to compete with banks and gain their share in the gigantic sector of the loan economy.

One of these alternatives to the classic bank has recently appeared on the market adjacent to the cryptocurrency market. This is understandable, given the fact that a huge number of classic and familiar financial instruments find a new interpretation in the rapidly growing cryptocurrency market.

A crypto bank [for example, BlockFi, Nexo or Celsius] operates according to an almost identical scheme used by a classic bank. Investors can make a deposit (both in regular currency and in cryptocurrency) and receive higher interest rates than a regular bank will offer them.

We are talking, say, about 8-12% per annum in US dollars and 4-8% per annum in cryptocurrency like bitcoin or ether.

Then the crypto-bank gives out the attracted funds of investors to borrowers. Moreover, as a collateral, the crypto-bank accepts from the borrower the cryptocurrency it has at its market value, and not a conditional and slightly supported credit rating.

Moreover, the crypto bank is insured against a possible reduction in the value of the cryptocurrency that it takes as a loan security by opening a borrower's margin account. What it is? For example, a borrower makes a deposit in a crypto bank in the amount of 1 bitcoin (BTC), which today costs, say, 10 thousand dollars. Against this security, the borrower can receive up to $ 4,000 of credit, and the remaining $ 6,000 is sent to his margin account.

If bitcoin will increase in price, then the bank has nothing to worry about, because the loan issued for $ 4,000 has reliable collateral in the amount of 1 BTC with a high market value. But if Bitcoin starts to fall in price, the amount on the margin account will decrease according to the formula:

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If the amount on the margin account approaches zero (that is, a sharp depreciation of the market value of the pledge), the borrower will receive a notification about the need to make an additional pledge. If the borrower does not do this, the crypto bank will sell the existing collateral, take a fine from the borrower, and thus will certainly not remain minus the transaction. In this case, the borrower should not repay the loan, but he will not receive his security back.

Product

relevance What urgent problem are solved by such crypto-banks, and why is the demand for their services growing steadily?

The fact is that interest in cryptocurrency is wave-like, it periodically intensifies and weakens. Some investors can keep a significant amount of cryptocurrency in their accounts frozen, hoping for its explosive growth in the future (the so-called HODL effect ). However, it is obvious that such investors may have an urgent need for money. Some investors in this situation will not want to sell the existing cryptocurrency, so as not to miss the moment of the price increase or to pay taxes on capital gains.

In this case, an alternative to them can be the loan tool described above offered by crypto banks.

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Conveniently? For a certain sector of investors - yes, of course.

Another group of crypto-bank clients - investors - who want to make high-interest deposits with regular (sometimes daily) interest payments and maintain deposit liquidity in the event of a recession in the stock market.

About risks

It is important to understand that a typical crypto bank is a less reliable organization than a classic large bank. Crypto banks have a shorter history (measured at best by several years), fewer staff, customers and money under management. Their activities are regulated by fewer legislative norms.

Crypto-bank deposit insurance in some form, although most often present, does not protect the interests of depositors as much as in the case of ordinary banks. For example, even the most advanced players in the market (registered in the USA) do not currently offer FDIC insurance to their investors.

They have a potentially higher vulnerability in cybersecurity issues, and this is a serious problem. For example, over the past 9 years, hackers have been able to steal about 1.74 billion dollars from various crypto exchanges. Of course, large exchanges as a result of such attacks most often do not go bankrupt and do not shift the responsibility for losing currency to users. However, there are currently no guarantees that crypto banks (and their investors) will not be on the list of victims.

Even without an external hacker attack, with a sufficiently large turnover of cryptocurrency, any young and rarely audited organization (which is also managed by a small number of people) may be tempted to manipulate trusted money in some way. On the other hand, many of them claim that they use escrow accounts - that is, third party accounts and the platform management does not have access to borrowers' pledges.

Of course, the increased risks are expectedly reflected by higher deposit rates (8-12% versus 1-2%). Therefore, for the diversification of the existing investment portfolio, the contribution (especially of a small size) to the crypto bank for many may be an adequate solution. However, taking into account the above risks (primarily operational), only an investor with a high risk tolerance will invest a significant part of the investment portfolio in crypto banks.

On the other hand, currency deposits in a crypto bank (for example, US dollars) are almost completely devoid of risk associated with fluctuations in the prices of cryptocurrencies (bitcoin, ether, etc.). And this is a big plus, given how high cryptocurrency volatility is. If the contribution to the crypto bank is made in US dollars, then fixed interest is regularly accrued to the investor in US dollars. Possible fluctuations in the value of the collateral received from the borrower, the crypto bank with a large margin depreciates and controls through a margin account.

Crypto Banks Overview

Currently, each Internet user can use the services of a large number of crypto banks, which differ in the degree of reliability, profitability, the size of commissions and the presence of additional bonuses for depositors. Here are some of the crypto banks that are available to users from Russia and which are industry leaders in terms of reliability.

BlockFi Platform

• Established: 2017
• Licensing country: USA. This is a big plus, as the company is audited in the USA, which has a very high degree of reliability. Compliance standards in the US are also among the highest.
• Terms of interest on the deposit:
• Up to 8.6% per annum on deposits in the “stable” currency (stable coins - USDC, GUSD) - a crypto-analogue of the US dollar.
• 5.1% . , .
• . . . .
• :
• . BlockFi ( -) (FDIC). .
• . BlockFi . BlockFi Gemini Custodial Services
• -

• - (Coinbase, Akuna Capital, SoFi, ).
• .
• .

Nexo

• : 2007 (Credissimo — ), 2017 (Nexo — )
• : . .
• : $700 , 200
• :
• 8% “” .
• . .
• :
• Medium

• Nexo BitGo, 100 .
• Onfido
• -
• TrustPilot
• Nexo . . 12%.

Celsius Network

• : 2017
• :
• : 450 , 67 , 160 . : 33 .
• :
• 8.32% ( — , )
• 2.53% , 7.25% -
• . .

• :
• . CEO - .
• Celsius ( Nexo) BitGo, 100 .
• -
• Celsius , 150
• Celsius CEL. , . CEL 30% . , 8% 10.4%, CEL 15%.

Not all crypto banks that are ready to accept investor money for the promise of profit have a degree of transparency and reliability commensurate with the level of BlockFi, Nexo and Celsius. For comparison, this platform offers even higher returns (up to 12% per annum), however, the amount of information and feedback on this service can hardly be considered sufficient. But this platform is an example of an almost outright fraudulent scheme. Obviously, a 5% daily capital gain has little to do with the honest and legal crypto-bank scheme.

How to open a deposit in a crypto bank

A brief step-by-step instruction for an investor who would like to make his first deposit looks like this.

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The sector of new financial instruments does not stand still and is dynamically developing. One of the new and promising solutions in this sector is the online mutual lending platform, which offers an interesting combination of increased profitability and risks. Moreover, many of the leaders in this segment are making ambitious plans to reduce operational risks and increase the ease of use of their service. Will their plans come true and will this type of lending be a serious competitor to traditional banks? Time will tell. But let's hope that thanks to crypto banks, a guaranteed yield of around 10% on deposits in dollars with a completely adequate degree of reliability will become a new investment norm.

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If the topic of crypto banks seemed interesting to you or you still have questions about the topic, write in a personal message or in Telegram (@xik_dign). Following the rules of Habr, in personal correspondence I can tell you how to make deposits in crypto-banks even more profitable and reliable.