Crypto’s magical math was made possible in large part by untenable interest rates in DeFi projects.
Source: mpvisuals/iStockphoto/Getty ImagesMichael P. Regan
Welcome to Bloomberg Crypto, our twice-weekly look at Bitcoin, blockchain and more. If someone forwarded this to you, sign up here. In today’s edition, Michael P. Regan looks at crypto-banking calculations that don’t add up:
New math
There’s a joke from last century that says bankers abide by what’s known as the “3-6-3 Rule.” They pay 3% on deposits and collect 6% on loans – a nifty business model that allows them to tee off on the golf course by 3 o’clock in the afternoon on a weekday, profits in hand.
The numbers have changed over the years – it’s something more like pay 0.1% on deposits now, and collect 5.7% on loans – but the 3-6-3 joke is still a pretty useful way to illustrate the net interest margins that determine how profitable a bank’s most basic services are. So long as that second number is greater than the first, everyone in the industry gets to tee off in the afternoon.
It’s obvious that Alex Mashinsky, CEO of Celsius Network, didn’t want to abide by any part of the 3-6-3 Rule. Not even the punchline about getting to the golf course by 3 p.m. “Stablecoins provide a necessary alternative to banking hours and 5 day work weeks banks imposed on us,” Mashinksy was quoted as saying in a 2019 press release
Yet now that Celsius has filed for bankruptcy protection, it’s the other numbers in the same press release that raise questions about the future of borrowing and lending in the crypto industry. Celsius back then was touting interest rates on stablecoin deposits of 12%, and loans starting at 4.95%. If you ran this type of 12-5-3 Rule by an old-school banker, they’d probably guess it meant they’d be filing for unemployment assistance (or bankruptcy protection) by 3 p.m.
Of course, it’s clear now that this magical math was made possible in large part by untenable interest rates in decentralized-finance projects, such as the 20% paid by the Anchor Protocol on the Terra blockchain that failed spectacularly and unleashed this year’s brutal wave of contagion. Perhaps COINBASE CEO Brian Armstrong should send the Securities and Exchange Commission a thank-you for killing the crypto exchange’s Lend program in the cradle last year?
A lot has changed since cigar-chomping bankers were making the 3-6-3 joke on the first tee last century. (In the metaverse, you can tee off at midnight.) Yet the future prospects of the digital-currency industry hinges on whether this type of new crypto math ever made sense, or ever will make sense.
For the moment at least, it seems like the trad-fi bankers are probably laughing all the way to the 18th green.
Charting it out
Crypto Winter Traffic
Monthly unique visitors on some of the largest crypto exchanges have dropped against a backdrop of market turbulence
Source: Similarweb
Footnote: Desktop and mobile, worldwide
Hearing them out
What we’re reading (and writing)
- The Collapse of Three Arrows Capital Became a Crypto Contagion
- Inside Celsius: How One of Crypto’s Biggest Lenders Ground to a Halt (Financial Times)
- Celsius Bankruptcy Filing Shows Long Reach of FTX’s Sam Bankman-Fried
- Texas’s Fragile Grid Isn’t Ready for Crypto Mining’s Explosive Growth (The Verge)
- Crypto ‘Cleansing’ Reignites Debate Over What Bitcoin Is All About
- The Need for Global Stablecoin Standards (Bloomberg Opinion)
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— With assistance by Joanna Ossinger
