DeFi, Why 52,000% Profit Is Too High

Bitcoin (BTC) and ether (ETH) are volatile but nonetheless keeping their levels up or that is at least how I see the charts. I would expect a break higher shortly but that is pure speculation. Crypto is a long game in the same way as Apple AAPL has been for the last 20 years.

I was in a bar in New York in 2004 and heard a young lady talking to a banker friend over a Martini. “What should I do with my Apple stock? It’s gone up so much.”

The banker said, “You should hold it, the future is great for Apple.”

I thought, “What an idiot, the company’s gone to the moon on the back of some toys, SELL!”

This attitude will get you 20% return a year every year and make you rich because that turns into x40 your money over 20 years, but it won’t get you x1,000, like the mad idiots that had Apple at adjusted 17 cents and held and held and held…. Or the Amazon AMZN holders in 2003.

So I have amended my stance on holdings. When you absolutely definitely know for sure that something is the best thing of all time because the angels told you and added a clap of thunder to underline their point, then you should hold forever. Otherwise dump that stuff when you have a 30% profit.

For me BTC is that hold forever thing. (Well at $40,000-plus a coin I will have a nervous breakdown.)

So I’m holding and now DeFi (decentralized finance) is here I’m looking at the potential of getting interest on my crypto on places like Compound and Aave and now Blockfi.

Now I have about $5,000 of kyber (KNC) in Aave currently earning. I have a big problem with that and it’s not the kyber, which is one of the new ranges of tokens listed on the Ethereum blockchain in the wildly risky new era of DeFi. I have a bunch of different ones and most will fail and a tiny few will be titans by the time I’m consigned to a rest home. I’ll be grinding on DeFi tokens to try and end up with these winners until then, because DeFi and these projects is the Dotcom boom (v3 or is it v4) of 2021-2022.

My problems are:

1) It cost me $35 to lodge the coins in Aave, and Ethereum is currently asking $25 to take them out. This is the Ethereum processing charge, not something Aave charges per se, and the withdrawal cost in Ethereum gas was $150 a few days ago. Sixty dollars of $5,000 is 1.2%, which is 1.2% of yearly interest swallowed in costs just going in and out. At $150 to just withdraw, things start to look ugly and there seems no control or cap on what that charge could go to. Now it is a fixed charge so the more you lodge, the lower that percentage cost goes, but you have to have spheres of tungsten to be thinking about putting huge sums into the fledgling platforms where the security is, let’s say, unseasoned. But for kyber this is not such a problem because of another problem: the deposit interest earned on depositing it is fluctuating between 30%-50%. This is a problem for me in another way.

2) Getting paid 30%-50% interest is a problem to me because I do not want to put my money with Bernie Madoff (version 2 or is it v3, v4 or v infinity.) Mind you, Bernie only paid 12% a year to his investors not 30%-plus, which is practically Russian in scale. 30%-50% deposit returns screams Ponzi. It screams it but with these platforms all the crypto tech delivers transparency, so you can see, or believe you can see, all the cogs and gears that reveals the system to be legit. But I can’t see why the rate is so high, apart from because it is. I can’t understand why enough people want to borrow this token at incredible rates and not do for other tokens or even why they would want to for any reason. I can twist myself up in knots to explain it but simply, “I don’t get it,” and that is often a fatal place to be when entrusting your money to third parties. Investing 101 says 30% interest is a red flag of colossal proportions, period. If this all blows up I will have no excuses.

However, there is my $5,000 of crypto tokens, spinning away making interest, one day at 50%, another in the 30%s and right now at 53.42%. I can watch the numbers spin up in real time hypnotized like any boggled gamer. If I was a tech hacker I could see it all buzzing away on the Ethereum blockchain and I could read the smart contracts and even try and hack them. If I want to I can pull my kyber in a minute back to my wallet and I can see my $43 of Ethereum interest in a smart contract locked up in my wallet software and go see it on the blockchain itself via a website like Etherscan.

WCGR? (What could go wrong)

My Gluteus Maximi know because I have to clench when I look at this situation, because 53% interest is against god and everything I know and believe about investing. But this is why the whole area is so exciting and why it is the next big thing, because it is so wildly against the old gods of finance.

So on the trail of sweating my crypto I have arrived at loving and fearing the DeFi platforms like Aave and Compound. I will slowly cuddle up to them and (my new catchphrase) “‘season” my relationship with their offerings. I’m prepared to risk flushing $5,000-$10,000 by blunder in this space with any one player but I’m not going to jeopardize $50,000-$100,000.

This leaves me looking for a home where I can feel comfortable parking a six figure crypto sum and here we come to Blockfi.

Blockfi has raised more than $140 million in capital from the likes of Fidelity, Coinbase and the Winklevoss Twins according to Crunchbase. That gets a big tick. It’s centralized and not subject to smart contracts (self-executing contracts), which scare me to death. It’s centralized, which is automatically seasoned by the regulators and cops who can come see folk that may play fast and loose in finance. There is an address and telephone number, not just a and an invite to chat on discord. In the U.S. the penalties of messing with investors are draconian and Blockfi has more U.S. money licenses than I care to count. That’s a big tick. The whole offering seems familiar and the interest rates are at roughly 4.5% if you put in $50,000 of BTC and $50,000 ETH. Interest updates daily and you get the pay-out monthly. You can put money in fast and pull it instantly. If this went belly up, then I’d be right to be annoyed.

Would I put 7 figures there? There will need to be a seasoning process for some time before I’d consider it. That will be the whole process of DeFi entering the mainstream and process of building trust and familiarization.

There are fortunes to be made in crypto-finance whether it’s DeFi or centralized but the only way to get into the necessary position to make those returns is to jump in and take the pain of risk and the slog of the learning curve.

I expect to pay for this process with a selection of small disasters, but I also expect to do very well indeed from it via many nice wins.

Risk equals reward, so they say, so the rewards should be high, but probably not as high as a 53.4% interest rate compounded over 20 years (5,200 times/520,000%).


Clem Chambers is the CEO of private investors website and author of 101 Ways to Pick Stock Market Winners and Trading Cryptocurrencies: A Beginner’s Guide.

Chambers won Journalist of the Year in the Business Market Commentary category in the State Street U.K. Institutional Press Awards in 2018.

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