Battle of yields? Two crypto asset lenders take different steps on interest rates

Two major cryptocurrency lending platforms appear to be going in different directions when it comes to paying interest to lenders. 

Less than 24 hours after cryptocurrency lending firm BlockFi announced that it will cut the yield for smaller lenders and boosting it for bigger ones, competitor firm Celsius said it will soon allow users to compound their interest. 

BlockFi CEO Zac Prince made it clear that this interest rate adjustment is a “proactive decision driven by crypto lending market rates and our supply/demand optimization.”

Comparatively, Celsius CEO Alex Mashinsky contended that "we earn more so we pay more." 

“I wanted to give a higher income to BTC and stablecoin holders and we found a way to do it,” he told The Block. 

It is not clear which means Mashinsky is referring to that can bring in more earnings. Lending firms typically utilize sophisticated algorithms to efficiently match lenders with borrowers to generate constant interest – especially in a nascent market that is not sufficiently liquid. 

Currently, Celsius offers a 2.5% flat rate for BTC, while BlockFi has a two-tier structure that promises a 6.2% yield to people lending out less than 10 BTC and 2.2% for deposits exceeding 10 BTC.

In an attempt to lure in larger deposits, BlockFi boosted its rate to 3.2% for people lending out over 5 BTC, while reducing the yield to 5.1% for less than 5 BTC. 

The impact of this new yield structure seems immediate, according to BlockFi. Although the new rates will be implemented on February 1,  BlockFi is already “seeing an uptick in larger balance deposits as a result of the substantial increase in rates to the higher balance tier,” said Prince.  

Meanwhile, Celsius stated that it has generated roughly $4.25B in loan origination to date.

To be sure, interest rate adjustment is common in the lending industry, since supply and demand for loans change constantly. To keep up the high yield, lending firms also need to be highly efficient in matching lenders and borrowers. 

In late 2019, a Bloomberg report suggested that the lack of borrowing demand may lead to a crash in crypto interest rates. While several market participants think the cryptocurrency lending market is far from becoming a credit bubble, the absence of a sustainable business model may make a battle in yields particularly damaging. 

“Many companies are grappling with lack of revenue and high expenses and cannot sustain higher yields,” said Dan Schatt, cofounder of decentralized lending platform Cred.