Inspired by the investment and wealth management products offered by traditional banks and Internet P2P financial platforms, cryptocurrency asset management has become the basic service of cryptocurrency trading platforms. The launchers include exchanges, wallet service providers, and even project parties.
To put it simply, investors use cryptocurrency assets in their hands as principal to invest in a wealth management product and receive interest after maturity. The Coinsaga team has sorted through the current crypto wealth management products from the mainstream trading platforms and wallets and found that their annualized return rate is between 6% and 10%, which is generally higher than the current traditional financial management target.
A question worth pondering is where do the returns come from? This is related to the source of income of various financial product providers.
Starting from earlier in 2013, the profit-making means of wealth management product providers has gradually evolved from the 1.0 version of arbitrage to today’s diversified models such as P2P lending, quantitative trading, and staking mining. However, most of the deposit-staking interest-earning services or wealth management products are managed by centralized institutions. In addition, the issue of opaque assets, theft of assets, high market volatility, and the health of the provider’s capital chain are all hidden uncertainties. Whichever link has a problem directly threatens investors` assets.
It can be said that financial products in the cryptocurrency industry also have systemic risks. “If the rate of return exceeds 6%, a question mark is required, and if it exceeds 8%, it is very dangerous, and if it exceeds 10%, it is necessary to prepare to lose all the principal.” This is a risk warning for regular Internet financial management platforms, and in the unregulated cryptocurrency finance market also serves as a warning.
Use high yield to attract investors
Among the many cryptocurrency wealth management product platforms, the exchanges that dominate the traffic have always been competitive players, and “Savings” has also become a product that various exchanges are investing in.
In the past month, many digital asset exchanges, including Hanbitco, ZB, and LBank, have launched a new phase of depository wealth management services, with annualized returns generally exceeding 10%. On May 30, Crypto exchange ZB’s QC wealth management product was launched. It calculates interest on a daily basis and supports cash withdrawal at any time, which has attracted 5,623 users to participate already.
A high annual return is the “secret weapon” to get users for this product. At present, the annualized return of QC wealth management products is 14.5%, and QC (QuickCash) is a stable currency issued based on blockchain smart contracts, and its value is anchored with RMB 1:1. In theory, its unit price is always stable at 1 yuan.
Not only stablecoins. On June 3, LBank launched a coin holding that creates interest, users on the site can participate in interest-earning activities of BTC and USDT. There is no lock-up requirement. The minimum participation amount for a single user is 100USDT or 0.01BTC. LBank also gave a 10% annualized earnings forecast. Unlike the ZB platform, where there is no limit on the amount of financial management, LBank sets a total financial management capacity of 10 million USDT.
In June of this year, Hanbitco, known as the “South Korean crypto asset trading platform”, also launched a new phase of depository wealth management products, of which BTC, XRP, and EOS have an annual deposit rate of 6%, still far higher than the product yield of traditional financial platform products.
In addition to exchanges, wallet service providers are also in the main positions for the introduction of wealth management products in the cryptocurrency sphere. Previously, some wallet service providers have launched wealth management products for different digital assets, with annualized return rates generally ranging from 10% to 20%.
Wallets and exchanges are indispensable tools for users of cryptocurrencies, and are also the main entry point for traffic into the cryptocurrency industry. In addition, other types of financial management such as “lock-up plans, dividends, and rebates” issued by project parties maintain investor interest and continuously attract investors to buy. These project currencies with lock-up financial plans often have higher annualized returns.
However, in recent years, with the failure of many blockchain projects, such self-produced coins and self-sell coins have gradually lost their competitiveness and trust among mainstream cryptocurrency users.
Where does the interest come from?
The current platform for launching cryptocurrency wealth management products mainly relies on the transaction business, loan interest generation, spot and derivative quantitative trading, staking mining, and other methods to pay user interest.
According to a practitioner who understands this ecology, Staking income mainly comes from PoS mining income such as smart proxy investment and node gains. In addition to daily handling fee income, trading platforms offer financing services that are not too dissimilar to traditional bank loans. Profits are obtained by lending various currencies to obtain interest; quantitative trading is a business done by institutional platforms such as wallets, launching wealth management product storage, and a professional quantitative team makes cash or derivative profits on the secondary market, and then pass this on to the users in interest. “The profitability of the quantitative transaction depends largely on the strength of the trading team. For example, Cobo Wallet has a team dedicated to quantitative trading.”
At present, wallets that provide wealth management services are a safer and more mainstream means of profiting, with some blockchain network nodes and provide an entrance for staking mining. After users participate, they regularly receive some revenue from the wallet nodes.
“Staking” is Proof of Stake (PoS), and refers to the behavior that an institution or individual participates in such as voting and verifying blocks in PoS tokens to obtain income based on ownership.
According to Staking Rewards website statistics, as of June 3, a total of more than 109 crypto assets have been opened for Staking, with a total market value of $16.8 billion, and the average annualized return of the standard coin is about 15.25%.
The annualized wealth management income provided by the exchanges mainly relies on lending, and its business logic is similar to the P2P lending business of traditional banks and Internet financial services providers. Nowadays, trading platforms including ZB and Gate.io have launched such services. The platform acts as an intermediary for users with leveraged trading needs and bridges users who do not use idle currency. In simple terms, it is a financing service. The party charges interest from the borrower, and the platform charges a certain handling fee.
In fact, as a financial derivative, digital asset management has a long history in the cryptocurrency realm. It can be traced back as far as 2013.
At that time, the profit model of the Bitcoin bank operator was “arbitrage.” The team used the Bitcoin spread between different exchanges to buy low and sell high to earn the difference.
When Bitcoin forms a global market, the liquidity and price transparency increases accordingly, and the price difference between exchanges becomes smaller and smaller. Gradually “arbitrage” cannot be used to make a profit. This profit model no longer exists. With the diversified development of the economic model of the cryptocurrency industry, coin-lending, quantitative trading, and staking mining have become the mainstream profit methods of some large-scale operating institutions.
Today, wealth management products that use digital assets as investment targets are already the basic business of major exchanges and wallet service providers for end users. However, whether it is quantitative trading, staking mining, or coin-lending, the coin market characteristics of highly volatile markets have also become an important factor affecting the expected annualized returns of wealth management products.
Hidden systemic risks
The purpose of wealth management is to manage financial affairs in order to realize financial preservation and appreciation. But over the years, while cryptocurrency wealth management products have become innovative and diversified, they have also caused capital losses to investors due to the immaturity of the market, unregulated operations, poor management of operating entities, and even bad actions.
In February this year, the digital asset exchange FCoin disclosed that it had a high shortfall, which triggered a large-scale run-up. Defenders include a group of investors who put money on the platform for financial management.
Previously, FCoin has launched a number of financial products, providing financial services in USDT, BTC, ETH, EOS, BCH, and other cryptocurrencies, and the annualized return rate of most cryptocurrencies is between 2% and 6%. It is worth mentioning that FCoin once said in an announcement that their wealth management products mainly profit through quantitative trading. In other words, the trading platform will also participate in the secondary market and play games with other users, which has become a model of “being both an athlete and a referee”.
The exchanges that provide coin-lending are not as strong as the outside world feels. On March 12 this year, the Bitcoin price fell from a maximum of $7980 to $5555. A day later, the price of Bitcoin was as low as $3800. At that time, the reserves of several trading platforms that provided lending services also saw a steep decline. With the departure of funds, the demand for loans in the cryptocurrency industry plummeted.
In addition to the biggest uncertainty in the market, team regularity and asset security are also hidden dangers behind the high yield of wealth management products.
In the fiat world, most wealth management products are launched by banks, insurance companies, securities companies, fund companies, and other registered and licensed financial institutions, subject to the supervision of financial management departments. Even so, people can still see news of frequent financial platform and trust product accidents. Not to mention the cryptocurrency industry, which is out of regulation.