Investors have a natural attraction for ‘fixed returns’, especially when the promised yields are high. But when they come from a notoriously volatile asset class, cryptocurrencies, they are an icing on the cake. Several crypto platforms are offering fixed returns from cryptocurrencies—ranging from 1% to as much as 250%—to attract investors. Bitbns and ZebPay, for instance, offer a bank fixed deposit-like product. Investors can lend their cryptos for a given number of days and earn guaranteed returns. The interest rate depends upon the token and the time period. Cashaa, which calls itself a banking platform for managing fiat and crypto deposits, offers a savings account-like product that promises up to 24% interest on cryptocurrencies. On UniFarm, a slightly sophisticated platform, projects come together to create a reward pool. It guarantees annual percentage yield (APY) of between 36% and 250%. APY is real rate of return by taking compound interest into account. There is no market exposure.

So, how do crypto platforms pay fixed returns from such a volatile asset? What is fixed in these fixed returns? Should you invest?

What’s On Offer

The simplest product is a fixed deposit of tokens. Bitbns, a homegrown crypto exchange founded in 2017, offers a fixed income plan (FIP) where users can invest a certain amount of USDT (Tether) or Bitcoin for a fixed period and rate of return. The rate of return varies between 8% and 40% annualised for tenures of 30-365 days. Another platform, ZebPay, allows investors to deposit their cryptos for seven, 30, 60 or 90 days. The return depends upon the period the investor has chosen. The returns, along with the principal amount, are deposited into the trading wallet at the end of the deposit term. ZebPay is offering an annualised yield of 1.30% on Bitcoin, 2% on Ethereum, 6.5% on Binance Coin and 7.5% on Polygon (Matic). Tether and Binance USD earn a higher rate of 9% and 8%, respectively. ZebPay also has an open term deposit where you can transfer your crypto assets back to your trading wallet any time. Returns are lower than in the fixed deposit scheme and are deposited into your wallet daily.

Another crypto lending platform, Vauld, offers similar fixed deposits where Bitcoin and Ethereum earn 6.70% and Matic 7.23%. Some tokens such as CAKE and AXS earn up to 42% annualised yield.

Cashaa, which claims to be the world’s first cryptocurrency financial institution with physical branches, has launched savings accounts along with fixed deposit products. It enables users to store, buy, sell and earn interest without risking assets to unknown DeFi (decentralised finance) projects, says the platform. The crypto bank also has ‘no lock-in’ deposit accounts where one can earn up to 13% returns. The fixed deposit plan, which offers up to 24%, locks funds for one-12 months. Bitcoin and Ethereum earn 8% interest. USDT earns 20%. The rate rises 4% if the investor chooses to earn interest in their token, called CAS. These pay interest daily.

UniFarm, which guarantees APY of up to 250%, is a crypto farming solution that offers various projects to investors. Users can stake any one token and get multiple tokens as rewards, says the platform. For example, if there’s a UniFarm pool of tokens $ORO, $MATIC, $REEF, $CNTR and $FRONT, you can stake any of these and start earning all the tokens as rewards. If APY falls below what the platform has promised, it will introduce additional $ORO tokens after eight weeks of farming to pay the required APY. Average APY on projects has been 40-50%, says Tarusha Mittal, COO & co-founder, UniFarm. “We offer a minimum guaranteed APY of 35%, which can go up to 250%. But in several cases (cohorts), APY goes beyond 1,700%,” she adds. The returns vary across projects. UniFarm earns from the fixed development fee that is charged from every project entering the cohort. Others earn by lending to institutional players and staking the coins.

How It Works

The platforms use staking algorithms and over-collateralised lending to generate high returns. Over-collateralisation is provision of collateral that is more than enough to cover potential losses in case of default. For example, Vauld’s loans to its customers and institutional borrowers are over-collaterised by at least 150%, and typically repaid in 30 days. Collateral here refers to supported or accepted crypto coins.

Staking crypto is a strategy used by crypto platforms on behalf of their customers (lenders) to earn returns. It is a mechanism used by many cryptocurrencies to verify their transactions. Think of staking as crypto equivalent of putting money in a high-yield savings account. When you deposit money in a savings account, the bank lends it to others. In return, you receive a portion of interest earned from lending. Similarly, when you stake your digital assets, you lock up your coins in order to participate in running the blockchain and maintaining its security. In exchange, you earn rewards, calculated in percentage yields. The reward is in the form of additional tokens of cryptocurrency that you had staked and is credited to your wallet.

Staking helps the network remain financially sound, says Darshan Bathija, co-founder and CEO at Vauld. Bathija explains that staking is a first-party service. Polygon has its own staking service. So do platforms such as Matic, Solana and Luna. “It’s a strong financial incentive to hold your asset and participate in governance of the crypto space. Also, you get to accumulate the asset,” he adds. The crypto platform staking tokens on behalf of their customers in turn gets rights to participate in decision-making of the network. According to Staking Rewards, a data provider for staking and crypto growth tools, the total value of cryptocurrencies staked as of April 2022 exceeded $280 billion. Staking Rewards is tracking 215 yield-bearing assets with an average interest rate of 9.63%. The average interest rate has fallen from 11.08% levels in May this year.

However, crypto prices can drop quickly. A large price drop in staked assets can outweigh any interest earned on them.

Guaranteed Returns Are Not Real

While exchanges ensure that they over-collaterise borrowers, sharp movements in prices of tokens may reduce your fiat earnings. Imagine that you lend bitcoin for a 60-day period. If the price falls during the period, you may get your principal and interest back in bitcoin, but its value in INR terms will be much lower. You may make a loss.

“Nobody can protect you from market volatility in cryptos. Fundamentally, it is not possible to generate fixed returns in cryptocurrencies,” says Mridul Gupta, COO, CoinDCX.

Also, staking rewards in crypto aren’t like fixed returns given by centralised banks. Most blockchains revise their yields annually, says Shivam Thakral, CEO, BuyUcoin, adding that they offer flexible returns based on market conditions, price movements and principal amount. The higher your stake (or your exchange stake), the higher the staking reward.

Bathija of Vauld, however, says that interest rates do not change often. He says these commercial agreements are signed six to 12 months ago or sometimes two years ago. It doesn’t matter whether the market does poorly in a given month. These are long-term lending agreements and price of the asset does not impact yields so soon, he says. “The last time we changed interest rates for lenders on our platform was in April 2021.” But we cannot ignore the market risk.

Investors should also be mindful of the platform used to keep their crypto assets locked for specified durations, cautions Thakral of BuyUcoin. He warns of risks associated with using lesser known platforms that offer returns beyond market standards.

Should You Invest?

Investors, especially in India, are fond of avenues for generating passive income from their assets. Staking in crypto through DeFi platforms, says Thakral, solves the problem for an average investor who wants to earn passive income as well as gain from price changes. However, people who are not actively involved in crypto research and newer investors getting into crypto because of FOMO (fear of missing out) should avoid staking, he adds.

Also, these investments are suitable for those who are ready to lock-in funds for a longer term. If you are unsure of locking your tokens, you will be better off keeping your capital in Cashaa savings accounts, which can give up to 12%, says Kumar Gaurav, CEO, Cashaa. “Users with money which they need for daily expenses should not go for these fixed deposits,” he adds.

Also, slightly sophisticated products like those offered by UniFarm are suitable only if you understand how they work. These are meant for avid crypto investors as UniFarm’s guaranteed product provides returns in the form of several tokens. One has to understand the value and utility of these tokens in advance.

Crypto Returns in INR

While many retail investors wish to earn interest on cryptocurrencies in Indian rupee, that’s not possible as of now. “The moment you take INR and build some sort of an interest-paying product, irrespective of whether it’s in the loan space or not, it comes under the jurisdiction of Reserve Bank of India,” says Bathija. This means one will need a deposit-taking licence from the central bank.

Retail investors must play it safe and limit exposure to these products.

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