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Crypto Currency Exchanges and Offering Interest – My Take

One of the things that has been sweeping across the different crypto currency exchanges (or at least is slowly making its way) is the concept of interest on deposits. mcxNOW was the first site to start offering this, as it wanted to give people some rewards for keeping their coins on the exchange. But are these exchanges offering up interest a good or bad thing, and what do we have to look forward to in the future? That is exactly what we are going to be going over throughout this article!

The Beginning

As stated previously, mcxNOW was the first exchange to offer up any form of interest on deposits. The idea was pretty simple: if the site was earning money, there is money that can be given out to the members of the site. In fact, rather than having static interest (like we would experience with banks and deposits we make in them), it is highly dynamic and is based on the total deposits there are on the site and the volume of trades happening across the different coins. This leaves a very important aspect of it: the site can simply not lose money, despite paying out interest. If the volume starts to go down, the interest rates go down. If it goes up, the interest goes up. This is an awesome solution to what could otherwise be a complex problem. There are also a few other benefits to this idea:

  • It gets people to keep their coins on the exchange instead of in their wallets
  • It gets people to stay involved in the exchange
  • It increases the amount of volume of trades that are happening across the different coins (or at least those that are pretty popular, like Worldcoin)

Now, what you may not realize right off the bat is that by keeping coins on an exchange, we have a much bigger chance of making trades there. It more or less causes us to trade on that site instead of taking them elsewhere for exchange, which means that the site is earning more money (and it also means there is more interest paid out). On top of this, by rewarding interest based on the amount of volume there is causes people to trade more often than they might otherwise, since the more people want to trade the more money they will get back. Of course it does not change the fact that when we exchange we are doing it for profit as a primary reason, but it does help get us up and going much more often, rather than just sitting on coins and hoping to find a great deal or just watch them increase in value.

Another Clone Comes

Another site has taken on to the idea behind the interest system at mcxNOW. Vircurex, another exchange that allows trading different coins for one another, has started to reward interest as well. It is only active for a few different coins, but anything is better than nothing; especially if you are getting interest in coins there that you do not get it on at mcxNOW.

Now, when I say that Vircurex cloned the idea mcxNOW had, I am not saying that in a derogatory way. I think that the entire concept is awesome and it has helped me out considerably. I like being able to earn interest from my crypto currencies, and I really am hopeful that more sites will be taking on to the same concept as the future unfolds. Keep in mind that we are still in the very beginning of Bitcoin (at least relative to currency in general, and even the world). This means that things we come up with now will definitely have an influence on the future. And I am looking forward to more and more clones popping up.

The Risks Involved

There are some risks involved with taking part in these systems. In order to get some of the interest, you have to have coins deposited on an exchange. This has historically shown to be a pretty bad decision (with all the hacks, sites shutting down, etc.). Furthermore, you benefit from depositing more rather than less. In other words, it is almost as if the exchanges are trying to get as many coins in their wallets as possible, despite the pretty large security concerns that poses.

There are many people who keep all of their coins in exchanges regardless. For these people I can see the clear benefit. Even for myself, I love being able to earn from just having coins. Without the interest payments, my holdings would rarely increase (except for when I am doing trades, which does not happen very often since I am a pretty safe trader). With the interest, though, I can see my coins slowly inching their way up in number and value from day to day.

When I bring up the risks, it is important to note that I am not saying that any specific site is unsafe. But generally speaking, the consensus is that you will have less chance of running in to problems if you are in full control over your coins, rather than expecting a third party to do it for you. You can keep your own computers locked down, deal with cold storage, etc. When you have your coins entrusted to a third party, however, this just does not work. While the site may never have problems and may never be hacked, it is still a risk that you have to decide whether or not is worth it to you.

Interest Vs Investing

There are multiple exchanges that are public and offer up stock in their profits and business. This leads to a bit of confusion as to what the difference is between the two. When we look at sites like mcxNOW (which offers up interest for every one of its coins, rather than just some) and Vircurex (which offers up interest in just a few coins), the thing to pay attention to is that the interest is paid on balances that are just sitting there in your wallet. This is opposed to having to buy some stocks, then sell them when you are ready to cash out. In other words, you get to keep your liquid assets there (which would be your coins), able to be cashed out at any point you want, but still earn money for it being there. It is really just like a bank, only you have no idea what the interest rates are going to be until each pay out happens (which is different from banks in that with banks you always know ahead of time what your interest rate is). As the amount of trade increases on each exchange, more interest is paid out. As it decreases, the earnings do as well.

If you want to invest, these sites also offer up that option as well. Investing allows you to get a cut of all of the site's profits, proportional to how many shares of the stock you have. It is usually going to be much greater in terms of its benefit than if you just have coins sitting on each exchange, but it comes at the cost of not being able to withdraw whenever you feel like it. Instead, you may have to wait some time to get all of your shares cashed out before you can move the funds elsewhere. I think the best way to look at it is to say that the investment option is more long term, and the interest option is more short term. But keep in mind that you can always do both! You can invest in stocks, plus have some of your coins on the exchanges and then you benefit from both sides of it.

Pushing for Referrals

A side effect of the interest bearing systems a lot of people do not seem to think about is that it gets the sites free exposure. The interest earned is based on how much trading is happening, so as more people jump on the site, the interest goes up. At the same time, causing things like pumps and dumps also increase the interest rates and earn people more money. As a result, it gives a direct incentive for helping push people towards your favorite exchange, where you now have more liquidity on the market and also now earn from what the other traders are doing. It is an awesome idea, and so far has been working out pretty great! mcxNOW even takes things a step further on the referrals and offers up a second incentive: free mcxBUX for them. For people who use the exchange, this means that you get direct payments for pushing people to the site, plus the passive payments from the activities they do. It is a win for everyone involved.

Slowing Down Trading

A problem with the interest system is that it does sort of slow down trading, at least on coins that are not doing so well. It cuts down on the speculative trading because you have to decide whether you are going to make more money off of your interest (which is guaranteed, assuming that the site does not go down) or off of your trades (which you could lose significant amounts on, if your decision was made in the wrong direction or at the wrong time). This leads to a lot of people not doing much trading at all, and instead just sitting on the exchanges with their coins so that they can earn the interest that they would otherwise not be getting if the coins were just sitting in their wallet. I think that this effect is minimized to a point, though, in that most people who are big in to trading are going to be making much more than the interest pays out on average, so they will continue to do so. On mcxNOW, all coins pay interest so even if someone trades from one to another, they still earn interest regardless.

Conclusion

As someone who is getting more and more involved in the crypto currency scene all the time, I love how we can now earn money off it as well. As if trading were not enough incentive to be using exchanges, now with the deposits and benefits from our trading as well, it is just awesome. It is important for everyone to do their due diligence before putting any coins on an exchange that offers this, though, because just because it offers rewards does not mean it will never go down. And if the site crashes, you go from earning interest to having absolutely nothing. Do not let the greed consume you, and instead treat the exchanges just like an investment; interest or no interest, you are still investing in their well being.

Exchanges


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