BlockFi, a fast-growing digital asset platform, has notified users that interest rates paid to lenders will decline beginning May 1, 2021. In a tweet, BlockFi stated: rates and tiers for Bitcoin (BTC), Ethereum (ETH), Chainlink (LINK), Litecoin (LTC), and PAX Gold (PAXG) are changing.
Our rates and tiers for Bitcoin (BTC), Ethereum (ETH), Chainlink (LINK), Litecoin (LTC), and PAX Gold (PAXG) are changing effective May 1, 2021.
— BlockFi (@BlockFi) April 26, 2021
In a blog post, BlockFi explained that they set rates based on where they can find “compelling risk-adjusted returns with a minimal tolerance for loss.”
“As market dynamics change, our rates also change to reflect the current market conditions. This ability to adjust rates with market conditions is important, particularly within the rapidly shifting Bitcoin market. To better understand these changes, we should first look at funding rates, which are payments made to traders who hold long positions on crypto (i.e. those who’ve bet that the price will go up) and short positions on crypto (i.e. those who’ve bet that the price will go down). Last year, those funding rates were relatively low, so we were able to keep BTC APY for the highest tier at around 3%. But since the price of Bitcoin has increased so dramatically in 2021, the funding rate has gotten much higher, dramatically increasing the size of the payments made on long positions.”
BlockFi said there is low demand to borrow Bitcoin in a bull market and many participants want to borrow dollars to buy more BTC.
“After Bitcoin rose above $20,000 last year, demand for borrowing BTC gradually faded, hence the market rate fell. In order to maintain a healthy and sustainable lending/borrowing business model, we elected to lower our BTC yields instead of taking on more risk.”
The blog post is available here.