Canadian HISA Rates Update

I just reviewed the Canadian High Interest Savings Account rates. Not much has changed over the past year, the major banks are still at 0.75%. The only other issue to mention is about being cautious with issuers when your deposit is more than $100,000. Recent events with Home Capital have illustrated the importance of diversification and not chasing returns too aggressively. Even though interest rates are low, this is the reality, and an excessive hunt for yield will lead a reckless investor to losses.

Comparing Crypto Margin Lending Sites

As the digital currency financial system develops, a new type of investment is emerging: margin lending. Currency exchanges have created platforms for their users to take out margin loans in order to make leveraged currency trades and the margin funding itself is also provided by users. This goes against the traditional system of brokers providing margin. This development makes sense because it takes the exchanges out of the credit side of the transaction, and focuses their role on maintaining a market and processing transactions. The exchange still needs to work on providing users with a margin exchange that promotes liquidity by offering participants a fair marketplace. The relative success of each exchange will depend on the rules accompanying their own system.

The table below shows the simple APR for various margin lending platforms for various currencies. The way I calculated the rates in the table was to take the midpoint of the bid/ask in the current market at the time of writing then multiply this midpoint price by 365 to arrive at an annual rate.  I understand this calculation doesn’t take into consideration such factors as compounding, but the table below still gives us an idea of relative rates of return.

Bitfinex 17.53% 1.57% 7.14%
Poloniex N/A 6.28% 1.99%
OKCoin 31.02% 27.37% N/A
BitVC N/A 0.37% N/A

The first thing I noticed from this table is the widely divergent rates between each platform and between currencies. Each of the markets listed in the table provides bitcoin margin lending markets and the rates that can be obtained from each site are widely different. The rate on Bitfinex for BTC is so low as to compare with the rates offered by regulated banks in the fiat economies of North America, whereas the rate for BTC at OKCoin is at a massive 27.37%.

The best rate for both USD & BTC can be found at OKCoin, and OKCoin also offers CNY margin lending markets as well. So let’s look at the mechanics, liquidity, and rules of OKCoin in particular to see why this might be the case. OKCoin is based in mainland China and does not allow US based customers. This might partially explain the high rates for USD as there might be a lack of supply for these types of margin loans, but not the high rates for BTC. The mechanics at OKCoin for the margin lending market are pretty straight forward, with an open market of bids and offers and an auto-renew feature. The exchange states the margin rules call for forced liquidation in the event a trader’s margin falls below 10%. Without much experience on this platform or data at my fingertips, its impossible for me to say whether the risk of default is large. Judging by the high rates at OKCoin, default sounds like a real possibility. The exchange offers a service called “insurance” which costs 10% of the value of the interest earned. Whether this is a good or bad deal, or the details of coverage don’t seem to be disclosed. The fact that insurance costs a nice round number like 10% makes me think the exchange is up-selling coke & fries with margin orders.

Bitfinex is the largest crypto currency exchange and provides the platform with the most usability and an ecosystem of data from BFXData that publishes useful information from the exchange. Although Poloniex trades the most currency pairs and also has the most currencies listed for margin lending, Bitfinex is the most liquid and the market at Bitfinex is currently offering higher rates on Ether.

I wonder how these markets will develop? In terms of regulation, these exchanges will be in a constant negotiation/battle with regulators, particularly in the US & China. It might be beneficial to be located in a 3rd party country in order to fly under the radar of the shifting regulatory landscape. Another factor to keep in mind as these platforms develop is liquidity. A lack of liquidity might be a bad thing in terms of getting orders filled and keeping money invested, but a lack of liquidity could also offer opportunities for higher rates (being compensated for the lack of liquidity) and also arbitrage and hedging between platforms. I think as more margin lending groups start using APIs to move faster between platoforms, the rates of returns between platforms should converge. But maybe not, if the margin rules between exchanges are different, those different rules will mean different risks, which means different rates.

How Low Can Rates Go?

In North America at least, we are used to most interest rates being positive.  We go to the bank for a deposit and we are presented with an upwardly sloping set of rates.  We get some interest for making a deposit for 1 year, a higher rate for 2 years, and an even higher rate for deposits with longer terms.  The same is true when we negotiate mortgages on our homes.  Most of us are familiar with choosing between lower rates for short terms or paying higher rates to lock in for longer terms.  An upwardly sloping interest rate seems normal, but as some central banks in Europe are demonstrating now, interest rates on bank deposits and loans don’t have to be positive.  They can just as easily be negative and it all makes sense.

Remember the origins of banking. Specialist groups built physical vaults where depositors could store their excess wealth.  This tradable wealth in the form of precious metals, coins, and other notes needed to be stored in a secure location and accessed from time to time as the capital was needed.  Depositors paid banks to safeguard these assets and were charged for this service.  The arrangement is similar to the precious metals deposit and leasing businesses of today.

Leap forward to contemporary Keynesian central banking. Central banks around the world are trying to manage their economies by managing rates of interest. Central banks believe lowering interest rates will give market participants an incentive to borrow and invest. But in a world of free floating exchange rates this incentive disappears. At any moment of time, everyone remains at square one in an era of instant global communications. The failures of central banking have been apparent for decades, but those committed to the idea that a central government should control and manage our lives won’t allow the central banking process to end.

So as central banks keep lowering interest rates, their policies will continue benefiting borrowers at the expense of savers.  Those with excess financial capital will continue to see the value of their capital eroded by artificially negative real interest rates. Since the wealthy are by definition always in the minority, it remains politically popular to bleed their savings with low rates. In addition, with since fewer citizens understand how markets function and more citizens are committed to social democracy, we can expect this trend to continue.  My suggestion for the poor, borrow to invest (in education, in business, and in financial assets) since you have nothing to lose (you’re already poor).