What is Crypto Lending?
Cryptocurrency lending is an easy way making passive income by using the cryptocurrency that you own, which is not currently in use for the short-term future. Such endeavor can be quite profitable, seeing as lending capital via digital currencies can generate a much higher interest rate in comparison to bank accounts.
The Lending Mechanism
The lending cryptocurrency-based mechanism is based on the same idea as with fiat currencies, instead, you loan Bitcoin or other cryptos. The process has some variations based on the website that you are using, but it essentially has the same basic idea.
The lender makes his/her cryptocurrency holdings available to loan at a certain rate, either on an exchange or lending platform. Usually, crypto-based lending can be made either for personal use or margin lending.
Margin trading involves the borrower believes that a price increase will occur for a particular coin and will request to lend the funds from the exchange. Then the borrower will return the cryptocurrency alongside the interest rate at the specified date.
To mitigate risk, most lending platforms implement several safeguards in order to avoid losing money from wrong trading calls. One of these measures involves the borrower being required to hold and maintain a percentage of the collateral, which can then be given back to the lender, respectively the prices should drop.
Also, certain exchanges provide users the option of lending directly to the exchange, rather than a trader.
- The setup process for a lender account on an exchange or crypto lending platform is usually not difficult, requiring only a few minutes, thus making it a much process compared to setting up a bank account.
- Users do not have to closely monitor their funds, and to whom they are being lent out. Unlike day traders, crypto lenders do not have to perform fast actions.
- The borrower is the part who is most at risk. Consequently, if they short the price, and it ends up increasing, the loss will be theirs, rather than the lender’s.
- Most platforms use automated systems to ensure that the funds and interest rates are paid back to the lender.
- With margin lending, the loan isn’t given to a specific individual, but rather the funds are distributed to a lending pool which margin traders can access. This is an entirely different matter when considering peer-to-peer (P2P) lending platforms.
- Risk is generally low, but you have to keep in mind that this is a market that is not homogenously regulated. And so, the legal matters which will be enforced will vary depending on your location, and the jurisdiction to which the lending platform adheres to. Banks, on the other hand, follows the jurisdiction of the country their offices are located in. This lack of consistent regulation can complicate matters.
- Most platforms on the market charge high commission rates on the interest rates which are paid by borrowers. In addition, interest rates are set on a daily basis, and not over the full duration of a loan. This means that a daily profit cannot be ensured.
One recommendation would be to not lend at bottom rates and for long time-frames. This will basically freeze your funds, and if other opportunities appear, you will be missing out.
Spreading your loans is also a good practice. Lending out all of your cryptocurrency at a single rate increases risks and lowers odds for greater incomes. By distributing loans into blocks and lending them out at higher rates, and at different times, this can lead to increased profit margins for lenders.
Finally, the most important tip would be to proceed with caution and do your research thoroughly.
There are currently numerous lending platforms available on the market, all of which feature some minor differences. Regardless of what type of lending you are interested in, there are several platforms that you can look into: SALT, Poloniex, ETHLend, Bitbond, Othera, and Everex.
Lending Bitcoin and other cryptocurrencies can be an easy way of generating a passive profit, seeing as it doesn’t involve a lot of time or fast decisions. It is an ideal alternative to crypto and trading enthusiasts that do not have enough time to practice trading on a daily basis.