You can trade bitcoin to make money, but earning income by simply saving the digital currency in a risk-free account hasn’t been an option so far, since interest-bearing cryptocurrency savings accounts are rarer than hens’ teeth.
Now, though, Delta – a new web service from Hong Kong- and Vancouver-based firm Delta Financial – looks set to change that.
There have been some attempts at providing no-risk growth for cryptocurrencies in the past. Some cryptocurrencies are based on 'proof of stake’, for example, which causes coins to produce more coins, and therefore reward users for holding the digital currency, by generating more for them.
Others sell bitcoin mining power as a kind of derivative, enabling people to earn more bitcoins based on the quantity of gigahashes that they buy.
Delta Financial is the first organisation we’ve seen that offers traditional interest-bearing accounts for people simply depositing bitcoins, though.
How it works
Customers can store bitcoins and US dollars in separate accounts, each of which can earn interest, says Delta Financial’s co-founder, Euwyn Poon. There are separate interest rates for each currency, he explained, adding:
“Interest rates are dynamically adjusted based on supply and demand. They’re adjusted nightly to account for the amount of bitcoins and US dollars in the account.”
In addition, the firm guarantees a 5% minimum effective interest rate.
How can it do that? Without proof of stake, the bitcoin protocol can’t inherently generate interest on its own.
In traditional banking, accounts generate interest because banks loan your money to other people at a slightly higher interest rate than they pay you, enabling them to profit from your deposit while guaranteeing you a safe return.
Delta Financial does something similar, lending money from interest-bearing accounts to other customers. Those other customers use the loan for trading bitcoins against US dollars on the company's own margin trading platform.
“So deposit accounts reward savers, and on the flip side, active margin traders can take out loans with up to five times leverage,” explained Poon.
Leveraging and its risks
Leverage is a common concept in foreign currency trading. Currency traders deposit a certain amount (a 'margin deposit') in an account that they’ll use for trading currencies. The currency trading platform then lends them multiple times that amount, so that they can make more money by trading.
That loan is called ‘leverage’, and it is necessary for currency trading, because currency movements generally aren’t that volatile. That means people need to make bigger bets on currency movements to earn significant amounts.
Bitcoin is a more volatile asset than most currencies, although the exchange rate for the cryptocurrency has settled down in recent months.
In margin trading, the currency trading platform watches closely to ensure that the trader isn’t losing too much money, which would endanger the loan.
If the market moves against them too much and they lose too much of the leverage, the platform will execute a ‘margin call’, taking the trader’s margin deposit. In Delta Financial's case, that happens automatically.
“We do try to build in safety buffers into our margin trading platforms to ensure that risk is minimised as much as possible."
There are a few dangers here. The most common one is that the market moves quickly against a trader, and that the trading platform isn’t able to close out its position automatically by selling the coins or dollars it needs to recover its funds. After all, bitcoin is becoming a more liquid market, but it isn’t as liquid as many more established markets.
To cover this eventuality, the firm will cover deposited funds with its own reserves in the event that the market moves so quickly that a margin deposit is lost.
This raises another question: how can the company be sure that it has enough reserves to cover all of its margin deposits and bitcoin savings accounts?
“During our introductory release, we are only accepting deposits to the extent that we have the USD and BTC funds to match our reserves,” says the company. That’s one reason the company is restricting its service to start with, by running an invitation-only offering.
“We are working on other ways to insure funds in our interest accounts, which we'll announce prior to opening our platform more.”
Delta Financial, which is incorporated in Hong Kong with a software development office in Vancouver Canada, isn’t the founding team’s first rodeo.
Poon founded Opzi, a developer of social games for Android and iOS platforms funded by San Francisco-based startup incubator Y Combinator. He was also a corporate attorney in New York, specialising in mergers and acquisitions, and securities groups. He’s a clear high achiever, with degrees in both computer science and law from Cornell.
His co-founder, Wilkins Chung, also founded a Vancouver-based games startup, A Thinking Ape – another Y Combinator-funded mobile games startup. Furthermore, A Thinking Ape software engineer Mike Douglas is also on board.
One obvious danger is that interest-bearing accounts may bring the firm under regulatory scrutiny. For the time being it is only taking deposits in bitcoins rather than fiat currency (customers would have to move their bitcoins back out of USD accounts to withdraw them).
Hong Kong regulators currently don’t have a rule on the use of bitcoin as money, meaning that for now, the organization would appear relatively safe. However, it also means that the interest-bearing deposits made by its customers will not be insured by a third-party organisation.
“We are currently not insured by any governmental organization,” admitted Poon, explaining:
“We are working with legal counsel to determine the proper regulations that may apply to our product, and are committed to ensuring that our products are compliant with all applicable regulations as we move beyond our introductory period.”
Delta launches for invitation-only accounts today, Monday, 16th June.
Bitcoin image via Shutterstock