Cryptocurrencies have become the flavor of the season ever since the advent of the pandemic. The start of the pandemic saw Bitcoin and its brethren drop down to record levels (nearly $3K). A lot of people that were able to get their hands on Bitcoin in March or April 2020, laughed all the way to the bank in November 2021 when Bitcoin hit an astounding $68K!
Truthfully, that was a Bull Run, unlike anything that the investment ecosystem had ever seen. Nothing else (stocks, real estate, or forex) has been able to deliver the growth that cryptocurrencies like Bitcoin did. In an interesting survey conducted by CNBC, it was found that more than 15% of individuals in the age bracket 18-34 had invested in Bitcoin.
One of the major reasons for this mainstream acceptance is because exchanges, financial institutions, and governmental authorities are coming up with policies, proposals, and products that are centered on cryptocurrencies. In this article, we are going to discuss one area of the crypto ecosystem that is gaining ground- Banking.
Cryptocurrency Banking: The Opportunities
The first cryptocurrency, Bitcoin emerged in 2008. Ever since then there have been numerous ones that have been launched in the market. Not all of them are promising, but there are around twenty or more that have really registered high growth volumes and risen in valuation.
Part of the reason why they have gained popularity is because of the level of security, privacy, and anonymity they provide. With an increase in mainstream acceptance, the rise of Bitcode Ai, improvement in governmental policies, and improvements in awareness, the need for financial products was felt.
Banks and Cryptocurrency Exchanges that there was a large market that had untapped potential. This led them to start financial products that centered around these digital assets-
- Loans backed by Cryptocurrency Deposits-
If you have a crypto portfolio, you can use it as collateral and get loans from it. This is very similar to what you would do and get from any other security-backed collateral. The major advantage of this is that the lending interest rates are much lower than you would have for any other asset that you would pledge to get. This is an attractive proposition for investors that are looking to raise capital to fund a business, buy a house or make other investments.
- High-Yield Interest Rates on Crypto Savings Accounts-
Another major financial product that is slowly becoming popular is interest earned on crypto accounts. This is very similar to what you would enjoy in your Savings Account in any bank. The difference and attraction in this case is the percentage of interest you are earning. Some exchanges offer interest rates as high as 10%, which results in significant increases on your deposits. When you compare the same with fiat currencies, you realize the difference.
- Crypto Staking and Earning for Defined Time Periods-
If you have been exploring earning opportunities from your dormant crypto deposits you would have come across the term Crypto Staking. This is similar to earning interest, but with a slight difference. Here, you have to commit your cryptocurrencies with exchanges (that allow for staking) for defined periods of time. In other words, you cannot sell or move your cryptocurrencies before the term period expires to earn the interest on staking.
All these three examples of financial products are for individuals that have been excluded from traditional financial institutions simply because they do not have the creditworthiness that is required to get a loan!
The Risks Associated with Crypto Banking and Financial Products
The demand for financial products is there. In spite of this, there continue to be certain tangible risks that should not be ignored. For example, there is still no mechanism to counter the volatility that exists in the Crypto ecosystem.
Today, one Bitcoin could be worth $50K. When it does, you might be able to get a loan for $40K from the Exchange. What happens when the same drops to $30K? In such an instance, you might have to make additional payments to balance the drop in valuations!
To counter this, experts had predicted that Stablecoins can be a safer and surer alternative. Yet the recent example of Terra and its falling sharply in the face of rising inflation shows that connecting digital coins to the valuation of the fiat currency is also not a good option.
The Bottom Line
There is no denying the fact that risks exist when it comes to financial products and cryptocurrencies. This can only be overcome when governmental regulators and authorities have specific policies in place as they do for traditional financial instruments and products. If you have any other questions that we can help you with, please let us know in the comments section below.