Why do platforms that give you interest on your bitcoins pay less now?

Currently, lending bitcoins (BTC) and other cryptocurrencies to certain platforms to generate interest on them is not as profitable as a few months ago. This variation is linked to certain market conditions, mainly linked to institutional investors, which force these sites to readjust the rewards for their users.

Basically, it happens that institutional demand for loans is falling, and that forces platforms to reduce interest they pay their users. This means that the big “players” — mostly companies – do not find the appropriate conditions to invest by borrowing money from the clients of these sites.

As a consequence, they do not get income from lending funds to institutional investors, which in turn forces them to decrease the interests for users who lend their cryptoassets.

According to the portal The Block, the interest paid by centralized platforms such as BlockFi, Celsius and Ledn has reached its minimum in more than a year. For example, in the case of BlockFi, the annual interest for holders from more than 1 bitcoin (BTC) it went from 6.25% to 1-3% to 0.35 BTC, plus 0.1% for larger amounts.

The other two platforms applied similar cuts. In addition, interest rates for deposits on stablecoins they have also come down by about one percentage point.

This situation occurs after two years of great growth of this type of services, which already accumulate millions of customers, according to the cited source. As of March 2021, these three companies mentioned above were managing funds of between USD 12,000 million and 20,000 million.

What makes interest rates go down?

As Crypto News has reported in recent weeks, the cryptocurrency market has closed many days with falls. This bear market could be one of the factors driving the decline in demand for funds borrowed from large investors.

On this point, a report published by the Ledn lending platform at the beginning of May details that bitcoin futures contracts are currently priced lower than the current value of the cryptocurrency market. This reduces the possibility of making money by buying bitcoin at one price (USD 30,000, for example) and then trading a future at a higher price (USD 30,500, following the same example).

As a consequence of this low profit margin for large investors (close to 1.66% for the next three months, as seen in the image below), they they do not find it too useful to borrow money to invest in this type of operation.

It is also detailed in the Ledn report that a lower volume of arbitrage between exchanges, which in turn reduces the demand for market makers or market makers.

The function of market makers is to borrow crypto assets to take advantage of price differences between exchanges. That is, buying on one exchange at one price and selling it on another in which the cryptocurrency is listed at a higher value.

However, Ledn explains that the yield that could be generated by buying USD 1 million in bitcoin on the Coinbase and FTX exchanges it has decreased by 50% in the last three months, from 0.16% to 0.08%. For this reason, it is no longer convenient for large companies to borrow to invest in arbitration.

Thirdly, the report also details the growth of decentralized finance protocols as another trigger for this circumstance. These compete with centralized platforms, such as BlockFi, Ledn and Celsiuis, among others, and “steal” potential investors from them.

Finally, conditions of the macroeconomic economy also condition the capital that investors allocate to cryptoassets and their markets, indicates Ledn. Some of them are the increase in dollar interest rates, the reduction of company profits in the face of recession and inflation of various national currencies and asset price movements of the stock market.