Gemini Launches Interest-Earning Program For Bitcoin

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Today, cryptocurrency exchange Gemini has launched an interest-earning program called Gemini Earn for select customers. With it, users can receive up to 7.4 percent annual percentage yield (APY) on the bitcoin or altcoins that they hold in their Gemini accounts. 

The era of earning decent interest rates on savings may not be returning anytime soon, as the global economy struggles hardly to recover from the pandemic. Yet a new crop of financial products has emerged offering eye-popping annual rates of 3% to 12%.

These types of incentives, once offered by some crypto outfits like BlockFi, have been proliferating as competition between exchanges heats up. With Bitcoin increasing seven-fold since March and mainstream institutions embracing crypto like never before, firms are seeing an influx of new investors opening accounts.

Gemini Trust Co., the crypto exchange launched by the billionaire twins Cameron and Tyler Winklevoss, on Tuesday became the latest to offer interest rates ranging from 1.54% on a token called Balancer to 7.4% for Filecoin, another obscure digital asset. Bitcoin deposits earn 3.05%. It’s the first account of its kind to be available in all 50 U.S. states, though it’s not available outside the country. Existing customers will get to open Earn accounts straight away on their mobile phone apps, while later this month new users can transfer their assets to Gemini from rival exchanges.

Gemini interest-earning program may look like an old-fashioned savings account. It pays an adjustable interest rate on deposits, and accountholders can withdraw their cryptocurrency at any given time with no penalties or fees. Just like a bank, Gemini makes money by loaning the deposits out at higher interest rates and pockets the difference.

But there are notable differences with a conventional savings account at your bank. For beginners, there’s no equivalent of FDIC insurance to safeguard deposits in the event the account provider should fail. And there’s no central bank, such as the Federal Reserve, to set benchmark interest rates in accordance with the economic outlook. Instead, Gemini and other providers set rates according to their own supply and demand analysis.

Bitcoin and other digital currencies are among the least understood and riskiest assets available. Unlike the U.S. dollar or the British pound, which increase and fall massively on economic or political data, cryptocurrencies are driven primarily by speculation. The price of Bitcoin can drop more than 10% in a single day or crash like it did in 2018, potentially wiping out any return from an interest rate.

“Consumers need to appreciate that this is nothing like putting your cash in a savings account,” said Sarah Coles, a personal finance analyst with U.K. investment firm Hargreaves Lansdown. “There’s a real danger if people assume they can make a big return without risking capital.”

Noah Perlman, Gemini’s chief operating officer, says Gemini interest-earning program should be seen more like an investment than a savings account. “It lets investors put their passive crypto assets to work and earn a return at competitive rates,” he says.

Demand for borrowing BTC and other digital assets is increasing as more institutional investors buy crypto, says Michael Moro, the chief executive officer at Genesis Global Capital, a Jersey City, New Jersey-based company that had $3.8 billion in cryptocurrency-related loans on its books at the end of 2020. Hedge funds, rich families and other investors are growingly borrowing cryptocurrencies to mount complex trades, mostly because it’s easier to borrow the assets than buy them. They are also using Bitcoin as collateral to borrow loans in U.S. dollars.

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