Banks make money by charging interest on loans. This falls into the category of common knowledge. But how do they get the money in the first place? They need people to deposit money into the bank’s accounts. But why give your money to the bank so it can make money using your cash? To entice people into depositing their hard-earned cash into the bank rather than using it for their benefit, banks pay interest on deposits.
Interest rates for savings accounts are very low, however. Typically, savings accounts yield no more than 1 percent. After all, the government and major financial institutions want you to save your money for retirement, unforeseen expenses, and major purchases – but not as much as they want you to spend it.
Financial regulators around the world have slashed interest rates to near zero to encourage people to spend and borrow money. A recent nominee to the Federal Reserve, the organization in charge of U.S. interest rates, has even indicated support for negative interest rates – which means your savings decrease in value over time.
With global interest rates at all-time lows, investors are looking to Bitcoin as an alternative to the conventional ways of holding money. Because of its unshakeable first-mover advantage, the world’s first cryptocurrency has earned the type of mainstream recognition necessary to fulfill its potential as a store of value. As the Bitcoin protocol is updated through new forks, the investment community will see new opportunities to earn returns on savings held on the blockchain.
Bitcoin Interest Fork Updates Bitcoin Protocol to Pay Interest on Saved Coins
Bitcoin Interest updates the Bitcoin consensus protocol to distribute interest payments to people holding Bitcoin Interest Coins (“BCI”) Basically, if you hold BCI coins for a set amount of time, you’re paid out a small amount based on how many coins you have and how many other people also held onto BCI during the same period.
Bitcoin Interest intends to mimic the same low-risk savings opportunities currently offered at low rates by traditional banks, but with a FinTech twist. However, this goal requires some assurance that the product is, as promised, low risk.
Wait, Haven’t We Seen This Before?
There’s an elephant in the room, and its name is BitConnect.
BitConnect is the name of a cryptocurrency exchange and coin created in January 2017 that promised to issue people large interest payments – up to 120 percent per year –for all BitConnect Coins they bought and held. Just like a commercial bank or credit union, BitConnect savings were lent out for interest-bearing loans. Everything was going great for BitConnect – which had hit an all-time high of about $437 – until just a few days ago. The exchange decided to close up shop after getting some threatening letters from the Securities and Exchange Commission, and now much of the crypto community is claiming the whole thing was just a big scam.
Fortunately for the investment community, there are several important distinguishing characteristics between BitConnect and Bitcoin Interest. First, Bitcoin Interest will be kicked off with an airdrop. To get BitConnect Coins, you had to buy them from the BitConnect exchange. Bitcoin Interest, on the other hand, will be issued on a 1-for-1 basis to anyone holding Bitcoin in a compatible wallet or exchange at the time of the fork. So, the first round of interest will be paid on BCI that people will be able to claim for free. Second, BCI coins can be held in user’s wallets, so they don’t have to be moved to the developer’s exchange to collect interest. Third – and most importantly – Bitcoin Interest distributes payments on held coins using something it calls “enhanced proof of work,” which is an update to the Bitcoin mining protocol. Every time a Bitcoin Interest block is solved, 12.5 BCI coins are rewarded to the miners for solving the block, and an additional 1.08 BCI coins are generated to facilitate interest payments.
Bitcoin Interest is not run on the typical pay-as-you-go pyramid scheme that most people suspect fueled BitConnect. This fork encourages investors to save their coins rather than trade them, which should have a stabilizing effect on the market as a whole. If it all works out, this will create the low-risk investment environment necessary to maintain a healthy cryptocurrency savings market.
The Bitcoin Interest fork may create a valuable new way to manage your savings in a zero interest or inflationary economy. However, exactly how this plays out in practice remains to be seen. After all, keeping savings is all about financial security – something not many of us associate with new crypto coins. For the time being, I suspect much of the cryptocurrency community will be watching how Bitcoin Interest will perform.