KuCoin Yields Have Investors Running Scared
In today's edition of YIYL, we take a look at the latest drama to hit the rumor mill surrounding centralized exchanges. It all seemed quiet this week, I guess a little too quiet for most drama farmers liking and suddenly out of nowhere, Tweets started to circulate regarding the insane APR's that Kucoin were offering users for depositing funds on their exchange.
When I say crazy I do mean totally nuts, these are APRs that make DEFI look reasonable, and when you see returns like this, red flags should be going off in your head.
The fear in the crypto industry is running wild these days with so many exchanges going bust and people sitting without access to their funds so its no surprise that exchanges have seen massive withdrawals of late. As exchange balances draw down it becomes harder to make money off of fees and off of using customer deposits to do market-making, since you have fewer assets to trade.
So to encourage people to risk their capital, you tease them with an interest rate, that's how the theory goes, but when a centralized crypto exchange, is offering almost 300% APR on Bitcoin (BTC), 200% APR on Ethereum (ETH), and 100% APR on Tether (USDT), you've got to think twice.
Fears of insolvency
This is not the first time people have cried that KuCoin is going bust but it is the latest one. In this month alone crypto analytics platform Nansen published its exchange stablecoin outflow chart, which, according to Lyu, mistakingly showed an ERC20 to TRC20 translation as $300 million draining from his platform, rumors started circulating about KuCoin being in trouble.
This was already enough to freak a few people out and Lyu has been busy with damage control. Earlier this month CEO of KuCoin Johnny Lyu announced that KuCoin will be providing Proof of Reserves “in about one month.”
He said KuCoin will be working with “authoritative auditing institutions” to make sure that the Proof of Funds accurately represents the assets on hand. Now as the deadline gets closer it would make sense that you'd want to attract capital back to your business so that you can take the healthiest snapshot when you release your proof of reserves.
https://twitter.com/lyu_johnny/status/1590204710170300416
I am not accusing anyone of anything but when there is smoke there is fire and when a CEO has to constantly come out and squash rumours, it's not a good sign. We saw that with many of the exchange CEOs in the past and look how they all turned out.
Interest rates are a sign of weakness
I don't think people realise that high-interest rates are not a good thing, when you're a company or individual borrowing money and you don't have any assets, or have shitty assets, the terms of the agreement would compensate with higher interest rates. If your lending is risky, you need a higher interest rate, if your risk of default is high, you need a higher interest rate.
Higher interest rates are a sign of weakness, and in the shitcoin space, high yields are used when an exchange or any other platform is running out of certain assets and needs them to cover their liabilities or for any other reason.
However, yields of hundreds of percent are almost impossible to achieve, and so crypto Twitter was right to assume something sketchy was happening.
So how the bloody hell is KuCoin offering over 100% APR on bitcoin?
https://twitter.com/otteroooo/status/1550713709554651139
The centralized exchange explained that the high APRs are part of its dual investment strategies, which involve depositing one crypto asset with the possibility of earning yields based on two assets. How much the depositor will earn depends on how the deposited asset performs at maturity.
So in other words its a marketing gimmick, you're not going to be paid out in the native asset but rather in a combination of it and a shitcoin, most likely one they can print out of thin air, like Kucoin shares or ones that new projects have given them as part of listing agreements.
KuCoin has been around the block
KuCoin has been around since 2017 and in that time it's survived plenty of market drawdowns and even a massive hack of $280 milllion, and continued to operate. Now that's not me saying they can't go bust or declare bankruptcy, just a testament to their track record.
Personally I wouldn't be leaving my funds with a service like this, nor take a risk on APRs like that, but too each their own.
Sources:
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Let's hope for the sake of crypto they don't go bust, these interest rates are insanely high and IMO are not a good sign
Its a double edged sword, one the one side you get rid of leverage, you get rid of a central point of KYC and failure that could be captured, but you also lose a massive liquidity provider
Hopefully they aren't insolvent and the same goes for these other exchanges such as Binance. It certainly has to be called into question when these yields are so high. I mean where the hell would it be coming from? Because most of these services will offer that and keep part of the return and pay users the majority of it. Those yields are too high to be coming from anything currently. Especially when exchanges like Kraken are laying off over 1000 people and other exchanges are imploding.
I hope so too for the customers sake, having to go through bankruptcy and having to wait to only get a few cents on the dollar on an asset that can x5 easily is a real dick punch but thats the risk you run with using an exchange to hold your funds
From my understanding they paying it in other coins not the native coin, i assume they're trying recapitalise using their exchange token coz there's clearly a shortfall on the prime assets bitcoin and stablecoins
If they can secure enough deposits good for them, but this doesn't bode well for them the longer the delveraging continues