Abstract:
This article will be discussing how a person can generate a passive income from their cryptocurrency using CeFi platforms (centralized finance). It will focus on compounding cryptocurrency payments, which platforms are available for users as well risks involved.
Disclaimer:
This article should not be interpreted as investment advice. If a person wishes to invest their funds into cryptocurrencies or use a CeFi platform, then they do so at their own financial risk. It is expected that a person seeks investment advice from a qualified financial advisor first before investing in cryptocurrencies and has a good understanding of the security risks involved.
Introduction:
At the time of writing the Reserve Bank of Australia (RBA) has opted to leave the nation’s official interest rate at just 0.1 per cent. This has been kept at a historic low with the intent of enticing Australians to borrow more money from banks in the form of mortgages. This is one of the factors why Australian house prices particularly in the metropolitan areas continue to rise in price and are now some of the most expensive in the world.
On the other hand, low-interest rates give Australians little advantage if they are savers as it just serves to reward those taking out further loans. The Australian Bureau of Statistics states that there are currently 3.9 million Australian retirees, while most of these retirees are relying on their Superannuation for their daily living needs many of them also have funds within their savings accounts which are now generating next to no passive income.
Younger Australians are now put at an incredible disadvantage, faced with increasing house prices, increasing rental properties and historically low-interest rates for their saving accounts it is near impossible for our younger generation to get ahead and form any wealth for their futures.
Most major banks within Australia will only offer a customer around 0.30 % p.a. for a savings account. Since these interest rates are so low it would make sense for a person to shop around for a better deal to grow their wealth faster or completely exit the old traditional banking system altogether.
Cryptocurrency:
Cryptocurrencies give a person many advantages over the traditional banking system.
• It is a decentralized currency, no owner, no bank, or government has any control over it. It is valued by the global market.
• It can be sent anywhere in the world within minutes in a true peer to peer method, with no 3rd party needed to oversee the transaction.
• It gives the person the ability to be their own bank (non- custodial) and have control over their wealth.
• Some cryptocurrencies are capped at a limited supply. In theory, the value of these capped cryptocurrencies should go up over time outpacing the rate of inflation for fiat currencies.
• Cryptocurrencies such as USDT and USDC are pegged to the USD one to one. (A stable coin). This giving the person the option to sell out their cryptocurrencies into a stable coin and wait to re-enter the market.
• Blockchains are very difficult to hack (but not impossible). It is a fact that Bitcoin’s Blockchain has never been hack to this present day.
Compounding Cryptocurrency using CeFi:
It is expected that the reader already knows how to buy and sell cryptocurrencies from a given exchange. Investing in cryptocurrencies does carry with it some financial risk however long-term data taken from the top 2 cryptocurrencies biggest by cap market value (BTC and ETH) states that their value has increased exponentially over time and has far outpaced the inflation rate of fiat currencies.
A cryptocurrency holder can choose the safest option by leaving their holdings in their chosen digital wallet and wait overtime for its value to increase. Or they can choose to add risk by making their cryptocurrency work for them by compounding it using a high-interest saving account (A crypto bank). This is possible by using a 3rd parties centralized finance platform (CeFi). At the time of writing the top 4 most popular CeFi platforms that offer this service were:
Cryptocurrency interest rates:
BlockFi (New York City) BTC 5% ETH 4.5%
Celsius (New York City) BTC 5% ETH 5.0%
Nexo (Switzerland) BTC 6.0% ETH 6.0%
Crypto.com (Hong Kong) BTC 6.5% ETH 5.5%
Banking interest rates:
ANZ Savings (Australia) AUD 0.30%
NAB Savings (Australia) AUD 0.30%
Reviewing the interest rate column to the right it is clear that CeFi platforms offer a much better interest rate than any traditional banking system for their savers. If BTC and ETH continue to grow in value over time, then a person’s wealth would very quickly outpace any passive income that they generate from a traditional savings account simply by
compounding the rewards.
Security Risks and Disadvantages with CeFi:
Whenever a 3rd party is involved there now includes an element of risk. The old saying in the Crypto industry still stands “not your keys, not your crypto”. When a person has chosen to hold their cryptocurrency with 3rd parties, they have given up ownership of their private key, technically speaking they are now no longer the owner of their cryptocurrency, which goes against the libertarian ideal of cryptocurrencies being decentralized.
Cybercriminals are now all too aware that CeFI platform represents a treasure chest of cryptocurrency wealth. This making them a prime target to be hacked and their employees to be corrupted or blackmailed into giving up security secrets.
In a worst-case scenario, one of these CeFi platforms could fall victim to a hack attack whereby their customers lose all of their funds and it must be noted that this has indeed happened to centralized exchanges in the past.
CeFi platforms are also well aware that they are targets too, and so have implemented the best cybersecurity personnel to work with them to keep their platforms safe and secure. Some of these platforms now offer insurance as an added layer of safety to their customers should the worst event occur. For added confidence, these top 4 CeFi platforms are based in countries governed by strict financial regulations so the chances of fraud or corruption can be limited. A person should be extremely cautious if one of these platforms is based in a country that is not known to have a respected financial regulator (The financial regulator for Australia is ASIC). A person is very much encouraged to have a strong password and implicate 2FA on all their CeFi wallets as they too have a responsibility to ensure that their funds are kept safe and should keep up to date with the latest “phishing” email scams.
Promotions:
From time to time these CeFi platforms will be offering promotional incentives for new users to hold their cryptocurrencies on their platforms, all a person has to do is comply to the terms and conditions set out and they can collect their rewards. There is also the added bonuses for referring the platform to bring other new users to sign up.
Discussion:
Interest rates around the world are at historic lows and in some countries, they are at negative rates. The RBA has not ruled out that negative rates could be implemented in Australia to stimulate further spending. Low interest rates do not favour people who want to save their money, and over time their money loses its purchasing power through inflation. A saver is effectively forced to spend their money or take out a loan to buy an asset (A house). CeFi platforms give people a new opportunity to grow their cryptocurrency portfolio. It would be extremely foolish for a person to invest 100% of their portfolio on a CeFi platform due to the risk of hacking attacks. But it is encouraged for a person to find out what level of risk they are comfortable with taking and invest a certain percentage of their portfolio to generate some passive income. It is still unclear whether these passive incomes are subjective to a capital gains tax (CGT) and depending on where a person lives it is up to them to find out what their local tax laws are. CeFi platforms will provide their customers with customer support services to manage their needs.
Conclusion:
Using CeFi platforms is an excellent way for a person to grow their cryptocurrency wealth over time. It is not the same as trading where a person must watch the market 24/7 and the more a person refers other people to the platform the more incentives both people can make. Cryptocurrency holders are encouraged to shop around and keep up to date with the latest CeFi platforms and the variable rates that they offer, they should also beware of the never-ending phishing emails that a user is expected to receive.
Robert Lavington
6/6/2021