Cryptocurrency-fueled interest-bearing financial products from BlockFi and others are being compared to bank accounts. However, this comparison is dangerous.
Would you put your entire savings in a high-interest financial product that uses the blockchain? While the idea may sound enticing, we cannot forget it’s still very risky.
Cryptocurrency-Based Financial Products: Too Risky?
Recently, Anthony Pompliano (@APompliano), co-founder and partner at Morgan Creek Digital, compared a checking and savings account with the bank to a cryptocurrency-based financial product.
In his tweet, he compares the interest rate for checking accounts (0.06%) and bank savings accounts (0.09%) with services like BlockFi. BlockFi currently has an interest-bearing rate of 4.9% on all BTC deposits. The rate for GUSD and USDC is a whopping 8.6%.
These numbers look good on the surface, but as The Block’s Mike Dudas (@mdudas) points out, they’re much riskier and shouldn’t be compared to bank accounts. Saying that people should park their funds in these high-interest options eschews these serious risks involved. Also, the goals of these financial vehicles is “100% different,” as Dudas explains.
So, it is time to “leave the old world and join the future,” as Pompliano says? While you should try out BlockFi’s services and others like it if you wish to accrue some profitable interest, it should not be treated as just another bank account.
The Sector Is Still Young
Cryptocurrency-based financial products and other firms of decentralized finance (DeFi) are booming right now. Most of them are on Ethereum, however there are companies now specializing in this sector. Companies like BlockFi are seeing new competitors pop up offering cryptocurrency investment options with promised returns.
Promising low-interest-rate loans with a profitable means of parking your funds might seem like an attractive option. However, these products come with their own set of problems.
Let’s not also forget that a major DeFi dApp on Ethereum was recently hacked due to an exploit. Others have also brought up the fact that enforcing financial agreements through mere smart contracts seems hard to enforce. As of now, this sector is very experimental – and saying it is as safe as a bank account can be downright dangerous. Also, trusting third-parties with your money is also a cause for concern, if it’s a company like BlockFi.
As the common saying goes, ‘not your keys not your money.’ The safest way to hold cryptocurrencies is in your own wallet. If you trust a third-party to use your funds for reinvestment in exchange for a return, that’s on you to decide. However, it shouldn’t be treated like a ‘better savings account.’