Here’s why Centralized Crypto Lending Platforms Are Very Risky, and Will Soon Go Bust.
The availability of cheap, cryptocurrency-collateralized loans is growing unsustainably and will likely induce a major crisis in the near future.
As blockchain technology grows in popularity, many crypto investors are looking towards crypto lending platforms to stake their funds and earn interest. Under the surface, there are massive risks, scandals, and dangers associated with this new and unregulated industry.
After doing extensive research into the crypto projects currently on the market, I’ve made a remarkable discovery. Around ~96.5% of projects that call themselves “decentralized” or “DeFi” actually have many centralized aspects built in place. Many are deceptively using the “DeFi hype” for branding, and marketing purposes.
I’ve received many questions over the last few weeks from individuals looking to take profits on their trades and want to invest in a lending platform that offers high returns. While these platforms may seem good from the outside, they should be avoided like the plague.
What is Cryptocurrency Lending?
The traditional financial system heavily relies on borrowing and lending fiat money. For instance, commercial banks frequently borrow money from the Federal Reserve, many traders borrow stock from their brokerage, and of course, consumers borrow from banks.
Since the crypto boom started, many projects have popped up in an attempt to sell services that would otherwise be highly risky, and unrealistic. Almost all of these projects are under no countries jurisdiction and have no insurances in place to protect investors in case of hacks, or insolvency.
Promises of high rewards come with high risk.
During the bull market, lending platforms essentially borrow thousands of investors' funds and are making significant returns by pooling them into cryptocurrency assets behind the scenes.
This might seem like a good idea during a bull market, but during a bear market, it’s a totally different story. As the bull market nears its peak and is likely weeks or months away from topping, the risks of crypto lending platforms are higher than ever before.
Critics warn this technology could be the next overblown bubble of the crypto world, akin to initial coin offerings (ICOs), with inexperienced investors at particular risk. In 2017, billions of dollars poured into ICOs, where companies raised capital by issuing new virtual coins. Most projects failed to gain traction, and many investors lost their money.
Ponzi Schemes Shilled by Crypto Influencers
When it comes to your investments, you should always do your own research. On Twitter, we’ve seen dozens of seemingly trusted, and influential pages shill lending platforms, many of which are Ponzi schemes.
In 2018, one of the most popular lending platforms known as Bitconnect was shut down by the owners. Bitconnect was shilled by dozens of popular crypto YouTubers, and Twitter influencers who made money by referring clueless victims. Months leading up to their exit scam, the website received multiple cease and desist letters and was involved in lengthy investigations by federal prosecutors.
If you aren’t familiar with the platform, Bitconnect was an anonymously run site where users could loan their cryptocurrency to the company in exchange for outsized returns depending on how long the loan was for. For example, a $10,000 loan for 180 days would purportedly give you ~40% returns each month, with a .20% daily bonus.
Bitconnect also had a thriving multi-level referral feature, which also made it somewhat akin to a pyramid scheme with thousands of social media users trying to drive signups using their referral code.
Of course, profiting from market fluctuations and volatility is a legitimate trading strategy and one used by many hedge funds and institutional traders. But Bitconnect’s promise (and payment) of outsized and guaranteed returns led many to believe it was a Ponzi scheme that was paying out existing loan interest with newly pledged loans.
Below is the Bitconnect Interest chart that would determine how much users would make using the platform:
Thousands of investors lost money when the entire platform was shut down, and the price dropped back to zero. This is why I occasionally tell people that price growth isn’t always an indicator of true value growth. Scams will always give out false promises and thus rise very quickly.
Counterparty Risk vs Technical Risk
Because cryptocurrencies are so volatile, almost all crypto loans are over-collateralized. In general, they require collateral ratios of 150%+ to secure a loan, which provides some safeguards for lenders to manage counterparty risk. So a potential borrower would need to put up at least $15,000 worth of crypto (BTC, ETH, etc) as collateral to get a $10,000 loan.
There are two major types of players in the crypto lending market, Custodial and Non-Custodial lenders. The main trade-off between custodial and non-custodial lenders is around Counterparty Risk (trusting a company) vs. Technical Risk (trusting code).
With custodial lending, you’re trusting that the entity will safely custody your crypto assets and limit counterparty risk from potential borrowers, ensuring your loan gets paid back in full and on time.
With non-custodial lending, you trust that the smart contract code will run as designed and does not have any bugs that will result in lost funds/hacks.
Until we see an introduction of regulations to protect investors, these types of risks are extremely high and aren’t worthwhile in my opinion.
BlockFi — Massive Ponzi Scheme
There are many crypto lending scams active on the market, and I couldn’t possibly cover all of them. So, I’ll be focusing on one of the more popular ones that I’ve done lots of research on myself, BlockFi.
Many big Twitter accounts like Anthony Pompliano have been non-stop shilling BlockFi, are being paid millions to do so. Since 2019, Pomp has posted 943+ tweets advising his followers to invest in this company.
Pompliano, like many (fake) Bitcoin influencers, promote decentralization and security solely for publicity, and engagement. If they truly believed in these ideas, they would NOT be actively involved in a 100% centralized scam that holds users' private keys, has no assurances, works as a bank, and is unregulated.
In their terms and conditions, it clearly states they are NOT responsible for ANY loss of funds resulting from cyber attacks, or technical difficulties.
In other words, in the future when they ultimately decide to exit scam by faking a hack, they will use this defense in court to protect themselves. And since the majority of investors don’t read the terms and conditions, very few know of these hidden clauses.
BlockFi Updated Website
BlockFi recently announced on their website that Bitcoin lending should have zero or negative rates. They essentially want you to take on the custodial risks & have YOU pay THEM to hold your Bitcoin, which is completely ridiculous.
Don’t get me wrong, the banks are corrupt, but these crypto lending platforms that are desperately trying to be banks are much more corrupt and shady.
As with everything I share, my only intention is to spread awareness for matters that are often overlooked by many, and provide a personal perspective. Once we enter a bear market, I predict that the majority of lending platforms and “DeFi” projects will disappear into thin air with everyone's money.
It isn’t news that the crypto space is littered with fraud and deception. I hope that this article can lead investors onto the right path, and help protect their money from possible scams in the future.
If you’re already invested in a crypto lending platform, It’s important to remember that many of these companies can disappear at any moment, and you should never have any substantial amounts of money staked. Don’t feel afraid to withdraw funds now, because, in the future, you might not be able to.
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Hope everyone has a great day! Thanks for reading.