What if you could earn interest on your cryptocurrency?
That’s the question being asked by Celsius Network, a New York-based startup that wants to use the power of Ethereum to disrupt the modern banking system and bring back financial independence to the masses.
Today, if you deposit fiat currency into a traditional bank, you would be considered very lucky to get even 1% interest on your deposit in most countries. Even if you join a high interest credit union, you will still likely get no more than 3-5%, and only on the first $500 or $1000 in your account.
The banks then turn around and loan the same money back to you in the form of a credit card or a personal loan at rates between 14% to 25% interest. If you have poor credit, that number could be much higher. Or you may be unable to get a loan at all.
So where is the money going between the low interest earned on deposits and incredibly high interest charged on loans? The answer: it’s all going into the pockets of bankers.
To make things worse, banks and bank loans are always stacked against younger generations. This is because younger people have shorter or no credit histories, and thus, are not able to get access to better loans and credit services. Even people of middle age are often unable to get the best loans because the top-tier services usually require a minimum balance of $1 million or more in order to qualify.
Many of us have been told to keep our savings in a bank so as to earn interest, and to keep ahead of inflation. And yet the opposite is exactly what we do with our cryptocurrency. We leave it in wallets that offer no interest, and instead rely solely on the assets ability to appreciate on it’s own.
The problem with cryptocurrency
How to Earn From Crypto Holdings? – Image via Fotolia
For anyone who invested early in cryptocurrencies like Bitcoin or Ethereum, they are now potentially sitting on a large pile of value. Even if their holdings aren’t massive, it still represents a portion of their wealth that should ideally be useful to them in some way. While some businesses accept cryptocurrency for payment, major purchases like a car or a house still need cash payments.
Unfortunately, in order to make full use of the value tied up in crypto assets, most likely one will need to sell them. Selling assets leads to two significant problems. The most obvious one is if the value of the asset keeps going up, then the seller will miss out on that upside.
The second, and perhaps less obvious consequence, is that selling cryptocurrency exposes one to taxes through what’s known as capital gains tax. Capital gains taxes can be large enough to be crippling, and can significantly detract from gains earned through appreciating asset values.
In response to this, a few cryptocurrency projects have popped up last year, each one offering a different solution to this conundrum.
Salt Lending, for example, allows users to take out cash loans against cryptocurrency collateral. The money for the loans, however, comes from banks primarily. While this is an improvement for cryptocurrency holders, banks are still involved, and so they will be seeking the lion share of the profits available. Celsius Network on the other hand has a completely different solution.
The community centric approach of Celsius
Instead of only creating a one way relationship, Celsius Network will allow its members to not only borrow cash against cryptocurrency collateral, but it will also allow members to earn regular interest on their deposits.
The system will be so flexible that one week a member could be a borrower, the next week a lender, and then later a borrower again. Each time when the member is a lender (has a deposit and is earning interest), the interest they earn could be used to pay the interest on a future loan, thus allowing for an incredible amount of financial flexibility.
Image Source: Celcius Network Whitepaper
A member could even have a deposit that earns interest, and have a loan for a purchase at the same time (For instance, a $10k deposit, and an $4k loan). The interest earned from the deposit could be enough to significantly mitigate or even cover the cost of the loan since the difference between the two is much smaller than at a normal bank.
Additionally, according to the IRS, loans do not count as income, therefore they are not subject to capital gains taxes.
How much interest can someone earn on Celsius?
According to the official crowdsale page, those who have deposits in the system will be able to earn “up to 9% interest for their lent coins”. So while not all loans will earn 9%, the amount of interest earned at Celsius will be vastly larger than at a traditional bank and even most credit unions. Celsius states that the lowest interest one could expect to earn on the platform is 5%.
Interest Schedule at Celcius. Source: Celcius Network Whitepaper
When it comes to taking out loans, the interest rate will only be slightly higher than the lending rate. A part of this difference will then be put into a pool that will be used to secure lenders from losses due to borrowers failing to pay back their loans.
When the platform launches sometime in the next few months, members will be able to deposit and earn interest on Bitcoin and Ethereum.
The company has stated that in the near future, they plan to add many more cryptocurrencies to their system. Their stated goal is to have all of the top 20 currencies available for deposits on the network.
The Celsius Degree Token
The purpose of the Celsius Degree Token will be twofold. First, Degree tokens will be necessary to purchase a membership into the website. This appears to be quite similar to how Salt Lending requires a minimum of one Salt token to get access to the platform.
But while Salt requires higher fees to get access to larger loans or more flexible terms, Celsius is much more straightforward. The amount you can borrow only depends on the amount of collateral you can put up to secure it.
Second, the Degree tokens will be how interest is both earned and paid. The idea is that when cryptocurrency funds (such as hedge funds) want to borrow an asset, they will need to pay for their interest in Celsius Degree Tokens. This will, in turn, ensure a steady demand for the token, and increase the likelihood of its value growing slowly over time.
For the crowdsale, Celsius Degree Tokens (CEL) will be sold for $0.20 each. The crowd sale starts in late February.
While there are a few other startups engaging in cryptocurrency related loans, the Celsius Network appears to be the only one that will be actively encouraging users to not only borrow money, but to lend it as well and earn interest on it.
The risk that lenders face will be very low due to two important factors. One, the cryptocurrency is being loaned to institutional finance groups (like hedge funds or cryptocurrency funds) and not individuals. Second, Celsius will maintain an insurance pool made with the interest collected from lenders. Funds from this pool can then be used to cover losses, if they are to occur.
This is in stark contrast to other P2P lending platforms like Lending Club or Prosper. On those sites, if a borrower fails to repay their (completely unsecured) loan, then all invested money is lost for the lender.
Today, the only way to earn interest on cryptocurrency is by putting it up for margin loans on exchanges, which presents a number of security concerns, or to earn a very low rate of return on bitcoin only, through bitcoin specific savings sites.
What Celsius will be offering could change the paradigm of how cryptocurrency works, and how we interact with it in our daily lives. It could encourage a new generation of savers to build up wealth, and borrow wisely.
Featured Image via Medium.com