Crypto meets Consumer Finance: Part 2
Hi friends,
Happy New Year! Hope everyone has been having a great holiday break.
This week will be a continuation of the previous piece on the intersection of crypto and consumer finance. Last time, I touched on 2 of the five key needs in consumer finance. This week, I’ll be discussing the other three.
Spending
Saving
Investing
Borrowing
Protecting
The goal, as before, is to go into these key jobs in finance that consumers need to have done, and how crypto today can or cannot fulfill these jobs and what may lie ahead.
Investing
When it comes to investing, the key job for consumers is to earn a return on their money. Here are how cryptocurrencies can fulfill these jobs:
As an asset by itself
Many individuals view cryptocurrencies as an asset to hold by itself to generate returns (in fiat terms) as part of a diversified (or undiversified portfolio).
While obviously being quite volatile, the historical returns for BTC and ETH for example have been quite impressive, and pretty much nothing else has gone from 0 to 500B/1T while being readily available to the public as quickly.
One way to consider this is to look at the recent returns for BTC over the last few years, compared to some other popular indices, and as you can see BTC crushed everything by some distance (and ETH would be even better).
Another fun chart is below which shows what stimulus checks invested into various assets might look like.
Similarly, here are the 2021 returns for a few cryptocurrencies and indices:
However, since cryptocurrencies tend to be more volatile, a better approach might be to factor in the risk. The Sharpe Ratio is one such measure, which is a ratio representing the risk-adjusted return, with a higher number being better.
As you can see below, BTC and ETH had Sharpe Ratios that were comparable to other big tech stocks, with ETH faring better than BTC and many big tech stocks.
The upshot is that BTC, ETH and others can be viewed as investments by themselves.
By staking or lending the assets
Staking or lending their cryptocurrencies is a way users can earn more yield on the crypto they are holding. Aside from any returns from price fluctuations on the assets, users can receive additional returns in interest.
Staking refers to participating in transaction validation on a proof-of-stake (PoS) blockchain. Users can use Coinbase or other platforms to stake Ethereum and other PoS assets and earn 5% APY in the process (or run their own validator with 32ETH).
Another option is to lend assets. BlockFi, Coinbase, and Nexo are a few centralized platforms that offer interest type accounts where users can earn 5-15% APYs depending on the currency for leaving their currency in that account. On the backend, the platform is essentially lending the currency to borrowers.
The image below shows the rates that Nexo currently offers.
Another option is to use DeFi protocols such as Compound or Aave to lend the currencies. The below chart shows the current APYs to deposit some common cryptocurrencies on Aave.
By investing the core assets into other projects
The same way people invest their fiat money in things like art, real estate, or stocks to earn returns, holders of ETH/SOL and other such currencies can also invest them into different types of crypto projects to earn returns on their investment.
NFTs: One option for investing ETH/SOL is to use them to buy NFTs (, the equivalent of purchasing say art or collectibles with Fiat. With OpenSea doing ~2-3B worth of transactions per month, it’s clear that many are viewing this as a way to trade/invest their money. With the explosion in NFTs, the floor of many popular blue-chip projects has more than 50Xed in ETH terms over the last year.
Liquidity Mining: While I touched on purchasing tokens and lending above, another way consumers can try to earn a return is by using their cryptocurrency for liquidity mining and providing that capital into liquidity pools to earn LP/governance tokens.
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Borrowing
When it comes to borrowing, people typically have a few key needs:
1. Taking out longer-term or larger loans, typically secured against other assets at as low rates as possible.
2. Short term loans/borrowing, typically unsecured and paid back relatively quickly for smaller purchases
Secured Loans
DeFi and CeFi platforms make it pretty easy to take out secured loans typically in USD or USDC against your crypto holdings as collateral. The loan to value, while varying, is typically 1.5 or 2:1, meaning you can get a loan of up to 50-67% of the value that you have as collateral.
This allows users to continue to hold onto their crypto, while raising some cash that they can use to make purchases including cars/houses, etc.
Today, most major mortgage providers or banks do not accept crypto holdings as collateral, so crypto can’t be used as an asset to borrow against through them directly, which necessitates using a DeFi/CeFi platform to first get fiat using the crypto as collateral.
Perhaps as the volatility of crypto assets goes down, it will be possible to borrow at lower rates and/or a higher percentage of the collateral.
Today, the interest rate can vary based on the loan to value used as below, but typical interest rates. are in the 3-5% range.
Some of the benefits of borrowing on CeFi/DeFi platforms using crypto collateral is that:
“Approvals” are instant and people receive the funds within 12 hours
Rates are typically based on LTV and currency pairs used rather than a “credit history” which minimizes room for discrimination.
Flexibility in loan periods and no penalties for early prepayment
The other side of crypto and borrowing is to be able to take out crypto denominated loans secured against other assets (i.e., house). This is not possible directly today likely given the volatility of crypto which wouldn’t make it a great asset to denominate principal/interest payments in. However, perhaps in countries where the currency is less stable, users may want to take out loans denominated in stablecoins in the future (or convert them into stable coins immediately after getting them).
Unsecured lending
Today some companies offer “crypto cards” which let consumers earn rewards and spend in crypto (most of them are debit so they don’t really allow for borrowing per se). Some even allow for credit cards but they just essentially let people borrow in the fiat currency rather than the crypto denominated currency.
One of the difficulties of lending on an unsecured basis in crypto is the need for a credit score type mechanism, which is likely why no true crypto cards exist yet. Ledgerscore and TrueFi are a few companies which are working on this problem. The latter allows for decentralized unsecured borrowing, but only supports institutions.
Some other areas I expect to see more in the future is some form of buy now pay later type mechanism for the purchase of NFTs and perhaps even some fungible tokens. This might especially work well in cases where the underlying assets have some utility or expected cash flow profile (consider Axie Infinity, SoRare, Zed.Run and other NFTs).
Protecting
The last key need in consumer finance is around protection. This takes a few forms:
Protection of assets themselves
Peace of mind and protection against other aspects
Protection of assets
Consumers care about having peace of mind and financial security and one aspect of that is preservation of their money / capital.
Direct Protection: In some sense, crypto is a form of direct protection in that they can be a hedge against inflation of local currencies. Given the fixed number of BTC, and over time declining number of ETH, many regard them as sound and ultrasound money, and so use it as a store of value.
Protection of Cryptocurrencies: Now, when it comes to actual protection of cryptocurrencies, while they do allow people to essentially protect them themselves on a hardware wallet, many people tend to use a centralized service such as Coinbase which has over 40M users. However, over 20M users have also signed up to use Metamask for example for Ethereum which offers a self-custody wallet.
One difference between centralized services like Coinbase and say using a bank for fiat is that cryptocurrencies are not protected by FDIC or anything similar. However, Coinbase itself carries crime insurance that protects some of their assets held against losses from theft or cybersecurity breaches.
On that note, a number of smaller firms are popping up which allow for insuring one’s cryptocurrency against loss or theft, such as Kase Insurance.
Protection against other aspects
Participating in the crypto-economy brings some unique risks such as smart contract risk. Decentralized insurance platforms such as Nexus or Unslashed allow for protection from things like smart contract bugs or breaches in a decentralized and community-oriented manner.
Lastly, the same way consumers take out policies such as travel insurance or life insurance for peace of mind, in the future perhaps some people may take those out either denominated in cryptocurrency or via a decentralized platform. A few examples:
Nexus states that it intends to expand into areas such as earthquake insurance
MetroMile now accepts payments of premiums in Bitcoin (although the premiums themselves are still fiat denominated)
Etherisc offers flight delay / cancellation insurance for travelers
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