How hedge funds are earning up to 20% a year on dollar deposits
The surge in decentralised finance allows hedge funds to run high-interest savings accounts for traditional investors
According to the latest crypto credit report by Credmark — a DeFi (Decentralised Finance) data and risk modelling company —crypto credit grew at an unprecedented rate between the fourth quarters of 2019 and 2020.
Active crypto debt now surpasses $15bn and crypto-lenders report a cumulative $40bn in assets under management. Such surges are an essential factor in the rise of DeFi dollar savings accounts.
Every metric in DeFi has increased by a factor of at least 100% in the past year as the demand for borrowing against cryptocurrencies reaches an all-time high. Perhaps one of the most impressive increases is in the interest generated, which reached an estimated $300m between the fourth quarters of 2019 and 2020.
With such stunning returns being driven by the relentless desire of private individuals and institutions to borrow against crypto, firms such as Ovex — a leading cryptocurrency prime broker in Africa valued at more than R2bn, can now offer high return-on-investment interest accounts, which can provide as much as 20% annualised interest for US dollar deposits.
Ovex is setting up an SA- or Cayman Islands-based hedge fund to facilitate these dollar investments through a regulated vehicle, giving traditional financial institutions access to these high-yielding and low-risk dollar investments.
Decentralised exchanges facilitate high-interest savings accounts
Ovex’s strategy driven by the “bullish” trend in cryptocurrency, and many institutions are now willing to pay hefty price tags for borrowing against crypto. The company also leverages a system that increases the profit margin of crypto trades: cutting out the middleman.
That’s the beauty of decentralised exchanges: By knocking out intermediaries and agents in each transaction, Ovex can shave a large chunk of costs from its operations. The company can then provide competitive interest rates for its crypto deposits. Those annualised interest rates range from 4% for bitcoin to 20% for Tether.
This is achieved by providing liquidity on decentralised exchange platforms, thus having no counterparty risk in the investment, with the only risk being the low risk of smart contract bugs, mitigated by Ovex through complex risk management strategies including limited risk to any smart contract and expert assurance to only deal with well-tested, externally audited, and Ovex-audited smart contracts.
Staking and Arbitrage
Ovex uses two methods to generate the higher interest it pays out.
The first is called staking, a method of generating coins that’s less resource-intensive than mining. Staking essentially means locking your coins in a smart contract and as a reward for providing the liquidity or securing a proof of stake network the staking party earns a yield on their stake.
Therefore, only investors who deposit the larger amounts with Ovex can reach the 20% interest rate. The large quantum of their deposit means they will statistically carry out more “proof of stake” than other depositors, and so are rightly rewarded for it.
The second method Ovex uses to reach the higher percentages is arbitraging the difference between crypto spot and future prices. By executing an arbitrage trade by buying on the spot market and immediately selling on the futures market (then holding the contract to maturity), Ovex can achieve a gain of between 6% and 45% effective annual rate and an average rate of about 23% annual percentage yield.
After the recent crypto market crash, high-interest-earning crypto savings accounts might be just the thing that investors need to keep getting returns on their investments.
To learn more about Ovex’s high-interest savings accounts, click here.
This article was paid for by Ovex.
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