Amid Global Liquidity Crisis, Crypto Lenders Are Being Paid Higher Interest Rates While Bank Users Are Being Paid Almost No Interest, Revealing How Central Banks Have Ruined The Savings Paradigm

March 26, 2020 / by Zachary Mashiach

Recently the Federal Reserve slashed the Fed Funds Rate to 0.00-0.25%, ultimately pushing savings rates for bank users even lower. Most banks are now paying 1% or less for savings accounts, which is less than the 2-3% annual inflation rate. However, simultaneously crypto savings rates have surged. This article explains why the crypto lending and bank savings markets are moving in opposite directions and how it is proof that Central Banks have ruined the savings paradigm.

First off, one example of how crypto interest rates are rising is BlockFi. Bitcoin (BTC) lenders there have seen the annual interest they are paid increase from 3.6% to 6%. Simultaneously, Ethereum (ETH) interest rates have risen from 2-3.6% to 4.5%, while stablecoin interest rates remain at a high 8.6%.

Zac Prince, the CEO of BlockFi, explains why they are able to raise crypto interest rates at a time when traditional interest rates are approaching zero. He saysSupply constraint as other market participants have pulled back on their lending activities, and ample opportunities for market-making and arbitrage coming out of the extreme volatility that we experienced last week.”

In other words, liquidity has declined in the crypto space. Now crypto borrowers are willing to pay more interest to crypto lenders in order to obtain liquidity.

Other evidence for rising interest rates in the crypto space comes from the website DeFi Prime which shows that crypto interest rates have been steadily rising during 2020 as liquidity continues to decrease.

Now compare this to traditional bank savings rates, which are generally below 1%. Even certificates of deposit (CDs), which are supposed to pay the highest interest rates, are only paying out rates of 1-1.5% which is less than the inflation rate of 2-3%. Essentially, even with interest, people saving with banks are losing purchasing power year over year due to the inflation rate exceeding the interest rate.

The crypto lending market is behaving as it should in a free market. As liquidity declines, interest rates go up since borrowers are willing to pay more money to get the liquidity they need.

However, in the bank lending market interest rates are going down since the Federal Reserve is printing money out of thin air to provide liquidity. Basically, instead of financial institutions paying savers, in order to incentivize people to save more money with banks in order to increase liquidity, the Federal Reserve is pumping in artificial liquidity in order to keep interest rates near zero.

Ultimately, Central Banks pumping in artificial liquidity has ruined the savings paradigm. At times like this when liquidity is drying up, people saving money with banks should be getting much higher interest rates, but instead are getting basically no interest.

This not only ruins the opportunity for people to make a significant amount of money by saving money with banks, but also removes the incentive to save with banks, decreasing liquidity further, and forcing Central Banks to pump in even more artificial liquidity.

The only saving grace and silver lining is that the crypto lending markets are still working as a free market should, since there is no Central Bank intervention, and therefore crypto savings accounts are an excellent venue for people to earn significant amounts of money via saving.

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