Business Systems Architect

How is it feasible for cryptocurrencies to produce significantly greater yield than bank deposits or bonds?

Some asked the following question on reddit recently…

It seems too good to be true to take cash in my savings account earning a fraction of 1% interest and convert it to crypto and hold it in a wallet that pays 2, 3, 6 even 14% interest depending on the wallet and coin held. Then add that most coins are appreciating assets and I feel like a rube for not buying crypto earlier.

Is this just bubble territory or is there a legitimate way for a company to pay me 14% interest for parking my crypto in their wallet?

Here’s what I think…

The question you should be asking is reversed in a sense.

You shouldn’t be asking how Celsius is making these returns feasible. You should instead be asking why your bank doesn’t produce similar returns with an ever-plummeting fractional reserve ratio.

You deposit a buck into the bank and suddenly bank lends out God-only-knows-how-many dollars to borrowers who then deposit the borrowed money into another account (or spend it and then the money inevitably still ends up in the form of a bank deposit anyhow) – and a geometric progression of deposits ensues. The entire banking system is predicated upon debt.

And yet, they give you a measly 1% or lower (and in some cases/countries negative interest rate) on your deposits.

Why?

Why despite fractional-reserve lending to the nth degree is the interest you receive still so low or negative?

That’s the first question to ask.

The second question:

Why is the interest rate plummeting across the board? Why does the Fed decide to lower the interest rates so?

Here’s a simple analogy: If I own a car-rental business, I charge a premium on rate of daily rentals when the demand is high. And when the demand for my cars is low, I must lower the rates to attract as many customers as I can.

Did the demand for money disappear?

Or is somehow demand vastly outstripped by supply of money?

  • If so, why does that happen?
  • Where does this supply of money come from?
  • Is the supply infinite?
  • What happens to the value of any commodity (money is a commodity just like any other – all securities are) when the supply becomes infinite?
  • How much would you pay me for a kilo of sand? Say $100 and I got as many bags as you can afford.

So what is the reason for money being so cheap to borrow/lend? An what is the inevitable consequence of currency becoming infinitely cheap?

That’s the second question.

Then there’s the final question you should be asking…

Here’s why BTC’s valuation is going up astronomically…

a. If there is a limited supply of something, but its demand grows with each passing day, what happens to its value?

b. What if the value of something limited (like BTC) is denominated in something that is floating and potentially has an infinite supply (USD).

The numerator goes up. The denominator goes down. Basic math would tell you that you should expect a “J-curve” for valuation. One that successful “unicorn” startups demonstrate. One that all the investors and venture capitalists so love.

You’re bound to see that happen with cryptocurrency sooner rather than later.

And of course, you’re a little bit late to the party. Some people joined in when BTC was like $250. But then again, in the grand scheme of things, you’re still early enough. I wouldn’t be surprised if BTC hits $1million … or even $10 million in the next ten years given how recklessly our “stimulus bills” are passed, and the ever-increasing frequency of their passing too.

No, crypto is NOT in bubble territory.

Instead, if you hold cash and any significant amount of it (I’m guilty but I’m making moves as quickly as I can) you’re holding onto the financial equivalent of an expanding hot-air balloon. One little prick, and we’re liable to face Weimar situation on a global scale. Fortunately, our “masters” are smart enough to try and hold on to that bubble for as long as possible, so you and I have some time before SHTF.

So to answer your question: No, of course not. Crypto is not in a bubble. USD (and consequently every single reserve currency worldwide) is. And of course if there is high demand for something, the rental income on that asset is high. A 2000 square foot house in rural PA can be rented out for maybe $700. But in downtown Miami, expect to pay $3500 for a similarly sized apartment.

Cryptocurrencies like BTC are valuable assets, and are becoming increasingly scarce, so of course they fetch a high rental. And that’s that.

Hope that helps
Lakshay Behl

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