22nd November 2022
Compliance Stuff is at the end of my daily missive.
Crypto staking part 2 looks at the centralized world of cryptocurrency exchanges.
Rumors of the imminent demise of Genesis Global Trading are weighing heavily on crypto prices. There are even concerns about its parent company DCG (Digital Currency Group). There is no reasonable prospect of a recovery in the price of BTC whilst the solvency of such a prominent player is called into question.
Curious Cryptos’ Commentary — Crypto staking part 2 — centralised vs decentralised
Crypto staking comes in two key varieties — centralized and decentralized staking.
Both have their advantages, and both have disadvantages. Staking in a centralized way is by far the simplest option, though it does come with its own unique risks. We will look at the centralized world today.
Most, if not all, centralized cryptocurrency exchanges will reward you for depositing and storing your cryptos on that exchange. For example, this is what Coinbase is offering as of today:
I should point out that certainly in the case of ETH, and probably for XTZ (Tezos). ALGO (Algorand), and ATOM (Cosmos), that Coinbase is staking your deposit in a decentralised way outside of the Coinbase environment. But for now, don’t worry about this wrinkle — later in this week’s guide to crypto staking, all will become clear, I promise.
Binance offers a product known as “Simple Earn”:
You deposit any one of a multitude of coins into one of the programs with the choice of tying up the funds for a specific period or retaining the flexibility to remove funds with no notice. The former attracts a much higher rate of interest — AXS (Axie Infinity) is paying over 50% APR right now for a 90-day lock-up period, but it has been over 100% in the recent past.
Again, for AXS, Binance are themselves staking your coins externally to the Binance ecosystem in a decentralised manner, taking a cut on the trade.
For most of the coins for which Binance Simple Earn pays a few percentage points of APR then this is simply a marketing ploy by Binance to attract customer deposits.
And all the other centralized cryptocurrency exchanges will work in a similar fashion, with wildly different rates across all coins.
The question that you are keen to ask is this — what are the risks?
The most important risk is a simple one. As exemplified by the recent fraudulent fiasco at FTX, if the exchange on which you deposit your coins goes bust — or is hacked as was the case with Mt. Gox all those years ago — you will lose up to 100% of your crypto holdings, and any coins that you expect to get back will not be paid to you for years or even decades to come.
There were several reasons why FTX has gone belly-up but one thing we have learned is that customer deposits were loaned to Alameda Research, a sister company that was a hedge fund, and a very badly run one at that. I suspect that many other similar businesses do the same.
I have often repeated that you should never store more than 5-10% of your crypto stash on a centralized exchange, and that you should only ever use Coinbase or Binance when you do so.
A corollary to that risk above recently engulfed those who had participated in Gemini’s Earn programme, as reported in the CCC on 17th November 2022:
Gemini is a centralized cryptocurrency exchange founded by the Winklevoss twins, who previously tried to claim copyright ownership over Facebook.
Gemini had a partnership with Genesis Global Capital to lend customers’ funds to earn a return for their clients under a program called “Earn”. Those funds are now frozen, Gemini put out a statement:
“We are aware that Genesis Global Capital, LLC (Genesis) — the lending partner of the Earn program — has paused withdrawals and will not be able to meet customer redemptions within the service-level agreement (SLA) of 5 business days. We are working with the Genesis team to help customers redeem their funds from the Earn program as quickly as possible.”
This means that even though Gemini is still fully functional — at least for now — a material proportion of their retail clients’ funds are now inaccessible with no visibility on when that situation might change.”
Subscribers to the Gemini Earn program signed Ts & Cs that explicitly stated that their funds would be loaned out. I find it extraordinary that anyone would even contemplate entering into such an agreement. Anyone who did so does not have the merest inkling or understanding of risk management.
If you were to ask me what proportion of my crypto holdings are being staked on Coinbase or Binance, the answer is very simple.
Precisely zero, as I believe the risks outweigh the potential rewards, but that is a personal decision — you must make your own mind up. The only coins I hold at Coinbase or Binance are for trading purposes or as a short-term speculative bag, everything is held in cold storage for the long-term.
Trigger alert warning — if any reader feels that they are “literally shaking” (as claimed by a Durham student who cannot emotionally cope with a different point of view) after reading my commentary, then I can only suggest you don’t read, or don’t shake. It’s up to you.
Cryptos — none of my commentary should be seen as a recommendation to get involved in cryptos. I might be talking complete nonsense without knowing it. Any crypto investments must be viewed as extremely high risk and treated as if they are worth zero until sold.
Stocks — just to make it clear this is not a stock advisory service. The CCC team does not provide financial advice in any way at all. Any reference to asset prices in this commentary are there to simply give context to the commentary and to give color to the performance of certain stocks related to cryptos.
For the avoidance of doubt, this newsletter is not an incitement to buy cryptos, buy stocks, or even to sell family members in the hope of buying cryptos or stocks.
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