LEGIT OR NOT? Poloniex has just announced ludicrously high 65% interest rates. But is it safe to lend them your crypto?
There’s an old saying in finance: If an offer sounds too good to be true it probably is.
That should be your first thought whenever someone is pushing very high rates of return: say like HEX token’s claim it is ‘designed for 10,000x returns‘ or the various Ponzi schemes like PlusToken or Bitconnect which pay existing users ‘interest’ out of money put in by new sign-ups.
Poloniex is offering to pay you 65% interest for borrowing your stack of USD Coin (USDC), and a much more modest 8.5% for borrowing your Tether (USDT).
That’s MANY times greater than competing offers: Coinbase will give you 1.25% for lending them your USDC, while Compound currently pays out 8.4%.
The announcement of such an absurdly high interest rate was greeted with considerable skepticism after it was shilled by TRON main man (and Poloniex investor) Justin Sun.
— Justin Sun (@justinsuntron) December 17, 2019
“I’m a Tron support, that just looks like a straight up scam tho. If it’s too good to be true it’s a scam,” wrote @edgarv68
“That’s what I thought too … money doesn’t grow on trees,” said @bondibox
@cryptodave tagged it with the hashtag #scampaign
Probably genuine, definitely risky
However, there are good reasons to think the offer is a genuine marketing ploy to attract new users.
Poloniex was founded by Tristan D’Agosta back in 2014 and while it has had ups and downs, it is still ranked at number 13 on CoinMarketCap’s new liquidity metric rankings.
That means it’s a real exchange with decent volume and low wash trading, so it has a lot to lose if it rips people off.
So high interest, in this case, is unlikely to indicate a Ponzi or pyramid scheme, which high rates of return usually entail.
But while there are reasons to think the offer isn’t a flat out scam, they are the same reasons you’d want to tread very carefully.
Poloniex is a bit desperate
Poloniex is in strife at the moment, having just had to shut its doors to US customers.
It has warned users they need to withdraw all their funds or ALL their crypto could be confiscated.
As a result, its wallets have been emptied.
A week ago CoinMetrics reported Poloniex was down to about one-seventh as much Ethereum as it had in January 2018 and it has even less BTC.
Poloniex’s supply of BTC and ETH plummeted after Circle’s acquisition, and are now at their lowest levels since early 2016.
— CoinMetrics.io (@coinmetrics) December 10, 2019
The offer is only available to European Union residents at present, or we’d be tempted to sign up and give it a go with a small amount of USDC.
But as the exchange is desperately in need of some new customers outside the US, a headline-grabbing stunt like 65% interest for EU users seems entirely possible.
Why do services borrow crypto?
The usual way such services make money is by borrowing crypto from users to lend it out at even higher rates, usually to margin traders (which is risky in and of itself).
It’s unlikely Poloniex is able to lend USDC to anyone for more than 65%, so if the offer is legit it’s probably a loss leader to get people into the ecosystem and won’t last.
The ads include a disclaimer calling the process ‘inherently risky’ – and it is even more so with Poloniex.
The exchange caused controversy after it socialized the losses of 1800 Bitcoin from its margin lending pool, which is a bit of a red flag about how they operate and may have contributed to the exodus of funds.
The exchange also made a rash announcement about delisting Digibyte recently (yet to happen) so it’s unclear if grownups are actually in charge over there.
So if you’re considering this, remember that the higher the reward, the greater the risk.