Diversifying Risk with Bitcoin Savings Accounts

While Dan Held has done some fundamental writing on the opportunity to earn a yield on your bitcoin, there remains the opportunity to explore the ability to diversify your risk by splitting up your lent coins among the various Bitcoin savings accounts.

Dan makes the point that while you are providing your Bitcoin to a particular lender, they could all be lending that Bitcoin to the same counterparties. He argues that this opacity to the real counterparty means that spreading your funds among different savings account products like BlockFi, Ledn, Celcius, Nexo, or Crypto.com, may not really decrease the risk of default.

While true, this might ignore other risks that are avoided by sharing the wealth.

The first is regulatory arbitrage. By housing your Bitcoin with organizations domiciled in a variety of countries you may ensure a better likelihood of redemption if there is negative regulatory action from the host country.

The second is a technological risk. While the likelihood that any Bitcoin savings account is exposed to technical disaster will vary, it will be difficult to determine which is the riskiest. While using UX as a proxy for technical competency can be an interesting heuristic, it is not foolproof or scientific.

A third is the business risk from the savings account itself. There is no doubt there can be a shortage of insight or an abundance of risk-taking among these companies. If one is more exposed to a price shock or gap, then the ability to have spread your holdings to ensure that your loss is not a total wipeout is significant.

The next risk is the competition for the rate of return. As there’s more competition and the spreads tighten, the opportunity to move your funds to the place where you’re treated best is valuable, and having the accounts ready when you need them is helpful. This very relevant today as BlockFi has announced their April 2021 rates with a significantly lower yield. We’re still waiting for rate announcements from the competition.

This strategy may increase the risks of password management and should be managed accordingly. It also exposes you to numerous rounds of KYC in varying jurisdictions.

Finally, retaining the Lion’s Share of your Bitcoin in self custody is a huge opportunity to make sure that you’re the only one that can screw up the fate of your wealth. NYKNYC as Andreas always says.