Updated Rates for BTC, ETH, LINK, LTC, and PAXG Effective May 1, 2021

Due to shifting market conditions, BlockFi will be adjusting the APY for several supported cryptocurrencies starting May 1, 2021. These changes will affect Bitcoin (BTC), Ether (ETH), Chainlink (LINK), Litecoin (LTC), and PAX Gold (PAXG).

Here are the upcoming changes that will take effect on 5/1.

Please note that our rates page will be updated on 5/1 to reflect these adjustments.

At BlockFi, we set rates by looking at where we can find compelling risk-adjusted returns with a minimal tolerance for loss. As market dynamics change, our rates also change to reflect the current market conditions. This ability to adjust rates with market conditions is important, particularly within the rapidly shifting Bitcoin market.

To better understand these changes, we should first look at funding rates, which are payments made to traders who hold long positions on crypto (i.e. those who’ve bet that the price will go up) and short positions on crypto (i.e. those who’ve bet that the price will go down). Last year, those funding rates were relatively low, so we were able to keep BTC APY for the highest tier at around 3%. But since the price of Bitcoin has increased so dramatically in 2021, the funding rate has gotten much higher, dramatically increasing the size of the payments made on long positions.

These conditions derive from low demand to borrow BTC in a bull market, since many market participants want to borrow USD to buy more BTC instead. After Bitcoin rose above $20,000 last year, demand for borrowing BTC gradually faded, hence the market rate fell. In order to maintain a healthy and sustainable lending/borrowing business model, we elected to lower our BTC yields instead of taking on more risk. 

Let’s take a quick look at some of the economic principles underlying our decisions. An inflationary currency like USD generally requires a positive interest rate to maintain purchasing power over time (in the absence of central bank intervention, of course). On the flip side, a deflationary currency like BTC should theoretically have 0 or even negative interest rates. That’s because the purchasing power of that deflationary currency should hold over time. 

We can look at the decentralized finance (DeFi) space for empirical evidence. Wrapped Bitcoin (WBTC) is an ERC20 token backed by Bitcoin that enables clients to use tokenized Bitcoin and trade it on decentralized exchanges. Currently, the supply of WBTC to Compound, which is a decentralized blockchain-based protocol that enables crypto lending and borrowing, is yielding a rate of 0.31%. That yield is near zero, which is in line with our hypothesis. 

All in all, shifting market dynamics, including a lack of low-risk BTC carry trades and reduced demand for borrowing BTC are the factors driving our rate changes. This update reflects current market conditions and enables us to maintain a healthy and sustainable business model while continuing to deliver high-quality, long-term service for our clients.

If you’d like to learn more about the crypto lending market and how BlockFi manages risk, take a listen to this interview with our Chief Risk Officer Rene van Kesteren, and this interview with our Founder and CEO Zac Prince. Want to know more about how we’re building a path to the future? Check out the details about our latest Series D fundraising round.