Multiple high-yield crypto interest-bearing accounts choose to lower interest rates due to reduced institutional demand

This article comes fromThe Block, original author: Adam Morgan McCarthy

Odaily Translator | Nian Yin Si Tang

Odaily Translator | Nian Yin Si Tang

Returns on cryptocurrency holdings on some platforms have fallen to their lowest levels in more than a year as institutional lending demand dwindles, undermining one of the market's most attractive selling points for smaller investors.

These platforms take deposits and lend them to institutional investors, before returning most of the proceeds to customers. According to BlockFi'sdatadata

BlockFi competitors Nexo and Celsius have also experienced massive growth. According to a recent paper published by Celsiusstatementstatement

, the company’s asset management scale has increased by more than 1,900% in less than a year.

As of March 2021, BlockFi held $14.7 billion in assets through its interest-bearing account, the BlockFi Interest Account, while Nexo and Celsius held over $12 billion and $20 billion, respectively.

Today, with stagnant cryptocurrency prices and weaker borrowing demand from institutions, many of these firms are cutting returns paid to clients.

For example, BlockFi previously offered 6.25% interest to users who held more than one bitcoin. And now, it offers 1% - 3% interest on users who hold 0.35 BTC, and an additional 0.1% interest on larger amounts. Similarly, Celsius also adjusted the rate from 6.2% to 3.05%.

Both BlockFi and Ledn lowered their stablecoin rates earlier this month, from 7.25% to 7% and from 8% to 7.5% respectively (for all stablecoins offered by both except BlockFi’s USDT). In March, Celsius lowered the savings rate for all stablecoins (except DAI) from 8.5% to 7.1%.

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Why is institutional demand declining?

In Ledn’s latest report on the rate cut in early May, it offered some reasons why demand from some institutions to borrow cryptocurrencies, a driver of consumer returns, is declining.

First, institutional traders find it easier to profit from contango in cryptocurrency markets when futures contracts are priced higher than current spot prices.

Contango allows traders to profit by taking a short position through options or futures while buying Bitcoin spot. A fall in the contango means less demand for borrowing to finance such deals.

Ledn also said that fewer arbitrage opportunities on cryptocurrency exchanges have impacted demand from market makers.

Market makers borrow digital assets for cross-exchange price arbitrage. For example, the purchase price of Bitcoin can vary from exchange to exchange, creating an opportunity for institutions to profit from price differences.

Ledn’s rate update notes that the average spread on $1 million Bitcoin buy orders on Coinbase and FTX has halved over the past 3 months. It has fallen from around 0.16% in February to the current 0.08%. This affects the returns that institutions receive from carry trades, which in turn reduces the propensity for institutions to pay higher borrowing costs for it.

Despite the drop in interest rates, Hickey expects yields to rebound. "People are continuing to invest, so I think this is a short-term phenomenon and we'll see yields move higher again in the second half of the year."

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what happened to interest rates

For now, however, interest rates on stablecoins and other major crypto assets have begun to drop. Ledn’s interest rate on all USDC balances fell from a high of 9.25% in March to 7.5% in early May. At the same time, BlockFi also lowered the stablecoin interest rate excluding USDT to 7% from 7.25% in the same period. On March 4, Celsius lowered the savings rate from 8.5% to 7.1% for all stablecoins, except DAI.

Starting in May, Ledn lowered interest rates on balances up to 0.1 BTC to 5.25%, and to 2% on balances above that level, while BlockFi also lowered interest rates for Bitcoin and Ethereum from 4% to 2%. 3%, in line with the rate cut that Celsius implemented in March.

Additionally, Crypto.com announced that effective June 1, the distribution and tier structure of its reward features will change. Currently, it splits its earning feature into two tiers: the first tier offers the full reward rate for allocations up to $30,000, while the second tier offers 50% rewards above that threshold.

From June 1st, the threshold for the first tier will drop by 90%, and the full reward rate will only be offered for distributions up to $3,000 in the first tier, while the second tier will receive the remaining at 50% of the first tier rate $27,000 allocation. Once both of these tiers are met, any subsequent distributions will fall into the third tier and receive the 30% rate of the second tier.