Huobi's new fixed-interest bitcoin investment product should have the hairs on your neck standing at attention

By Michael Carney , written on September 2, 2014

From The News Desk

Beijing based bitcoin exchange Huobi has introduced what amounts to the first virtual currency certificate of deposit (aka, CD) in a fixed income investment product that it’s calling the Dig-VC. The company describes the financial product as “The World’s First Hashing Power Mortgage.”

Under the terms of the 60-day investment program, which is offered through Huobi’s BitVC trading and investment platform, investors will be paid a fixed return of 1.2 percent per month (which would be equivalent to 16 percent per year if annualized), or 2.4 percent over the term of the investment. The first 100 subscribers were rewarded with a bonus 0.2 percent per month interest. According to the Dig-VC terms, investors may transfer their ownership of Dig-VCs within the 60-day subscription period, provided they can find interested buyers.

The company offered 2,000 such “subscriptions,” each valued at 1 BTC, and capped purchases to 50 units per subscriber. The offering sold out within an hour, according to a company spokesperson. The subscription record published on the company’s website indicates that it accepted a total of 2,174 BTC in deposits, equating to just over $1 million at a $500/BTC average, indicating that it slightly oversold the offering. Approximately 70 percent of these investors were from within China, the company notes, with the remaining 30 percent coming from around the world.

As bitcoin continues to mature, it’s little surprise that more traditional financial products are entering the market. BitVC has already offered consumers bitcoin savings accounts and margin trading accounts. When BitVC launched out of beta in August, Huboi’s Robert Kuhne told Coindesk that the service had attracted 5,000 users during its two month trial period and was growing in the range of 20 percent per month.

Despite this growing portfolio of bitcoin financial services, it’s somewhat concerning that Huobi remains an unproven and largely unregulated entity. (The fact that its fixed-term financial products website looks like it was designed by a high school student doesn’t help matters.)

And with this in mind, offering anything remotely close to a “guaranteed rate of return” should give investors pause. A 16 percent annualized rate of return is the kind of high-yield investment that traditionally carries extremely high risk. Traditional bank CDs offer interest rates in the low single digits and are backed by FDIC insurance, while the lenders themselves are subject to reserve requirements. Huobi, of course, has none of these traditional safequards. Taking on consumer deposits and guaranteeing fixed rates of return without these depositor protections demands the kind of institutional trust that bitcoin users have been taught to avoid – and for good reason given the history of ineptitude and fraud within the ecosystem.

Dig-VC (the company’s CD equivalent) returns are backed by Huobi’s Digcoin mining services platform, the company explains. Digcoin is currently generating 28 bitcoins per day in ($14,000 at a $500/BTC average value) at its current hashing power of 1.3 PH/s. The company revealed plans to increase this hashing power to 4 PH/s in the near future, which would give it nearly 8 percent of the global bitcoin network hash rate (computational power). It is unclear, however, if the company will be using the funds raised in this Dig-VC offering to buy this new mining equipment. But if that is the case, investors have even more reason to be concerned.

The good news for those worrying about Huobi’s solvency or smelling the early warning signs of a Ponzi scheme, the company recently completed an audit of its bitcoin reserves that demonstrated it held more than 100 percent of the bitcoins deposited by its customers – meaning the company had its own bitcoin assets. In a nod toward transparency, the company also published the mining pool withdrawal address.

With bitcoin moving increasingly into the mainstream, this is no doubt just the tip of the investment products iceberg we’re sure to see. On the surface, this is a good and healthy development for the maturing sector, but difficult questions need to be asked about who’s backing these investments and what promises are being made along the way to consumers. Huobi and its BitVC subsidiary would appear to at the very least wade in to the grey area between responsible and irresponsible behavior in this regard.

Whether this laissez-faire attitude comes back to bite these investors remains to be seen. For the sake of the industry as a whole, bitcoin entrepreneurs, investors, and bullish consumers should hope this is not the case. Life, however, has a way of punishing those who don’t learn from the past.