If you own crypto, you might want to hold onto it for the foreseeable future, particularly since it’s in a period of pretty intense volatility right now. There are ways that you can hold your cryptocurrency like Bitcoin but make passive income as you do so.
Some crypto owners act like bankers. They let lending companies use their assets, and they earn interest on loans.
If you own crypto assets, a crypto lending platform will sometimes pay a very significant amount of interest if you lend your assets to borrowers. A borrower might be an individual investor who wants to yield a farm, or it could be a large firm that wants to leverage crypto speculation.
The following is a guide to what to know about lending your crypto, so you can make the decision that’s right for you.
Types of Crypto You Can Lend
A lending platform will offer a range of digital assets that a lender can then provide to clients. Most lending platforms accept deposits in blue-chip coins, like bitcoin and ether.
Lender platforms will often also accept deposits in stablecoins.
A cryptocurrency-backed loan uses digital currency as collateral. The concept is similar to a securities-based loan.
In general, the principle is like a mortgage or car loan. You’re pledging your assets to get a loan and pay it off over time if you’re a borrower. If you’re the borrower, you maintain ownership of the crypto you’re using as collateral, but you do lose some rights to make transactions or trade it. Borrowers also have the risk of owing back more than they borrow if the value of their digital assets declines significantly.
For people seeking these kinds of loans, the benefits include the fact that the interest rates are comparatively low when you’re looking at alternatives like a personal loan or credit card.
The loan is based on asset value, and some platforms will let borrowers get access to funding that’s up to 90% of their portfolio value. There’s not a credit check, and the funding is fast.
So you can see how for a borrower, there are advantages but risks too.
How Much Can You Earn?
If you were to lend Bitcoin, as an example, you might see annualized yields range from 3-8%. If you have altcoins, yields can be in the double digits, and stablecoins can earn around 10%.
While this might sound great, there are some very real risks to keep in mind before you lend your crypto.
First, the regulators are intensely focusing on this area, and it could be that changes in the regulatory environment affect lending sooner rather than later.
Also, if the market crashes and then doesn’t recover quickly, it could lead to borrowers defaulting through a domino effect.
The risks are one of the reasons yields are so high in the first place.
Most platforms pay interest in crypto or a stablecoin, and it adjusts often based on market demand.
A lot of lenders offer tiered rates, so you can get higher yields on a smaller amount. Lenders can further boost yields with bonuses and reward tokens.
Since crypto markets aren’t centralized and are inefficient, there are a lot of opportunities to capitalize on wide swings in pricing. Market making is one way to make a profit with crypto. However, to make markets, you need inventory, meaning you might borrow Bitcoin or other currencies if you don’t want to buy them outright.
Is Crypto Lending Safe?
Despite being unregulated, lending platforms say they use risk controls and high collateral requirements. Sometimes, these requirements are up to 200% of the value of a loan for the most volatile types of crypto. A loan can be automatically liquidated if the price goes below a certain level.
Loan brokers can also issue margin calls, which then require that borrowers provide more collateral.
The lending companies obviously have a vested interest in their model of business working, which means that customers need protection.
Even so, as an investor who’s lending crypto, you can’t count on government protections against possible losses.
FDIC bank insurance isn’t available in crypto, and the industry isn’t as regulated as a brokerage or bank. Lenders might be conservative when it comes to capital reserves and loan-to-value ratios but still take some liberties.
Regulators are taking a close look at crypto lending. The SEC threatened to take legal action against Coinbase global if it launched a lending platform. In response, Coinbase canceled the planned launch. In several states, financial regulators have started inquiries or have issued cease and desist orders to lending platforms.
New York recently required two lending platforms to shut down, including Nexo.
The companies are arguing that their products aren’t in violation of securities rules, and they are contesting the orders to shut down.
Tips for Safer Lending
One thing you can do if you are going to lend your crypto is understood what you’re up against.
When you understand the market and the risks, you’re in a better position to protect yourself.
You should always monitor changing regulations. Crypto regulation has led to a lot of debates, and as mentioned, state regulators are cracking down, so keep an eye on these changes and how they could potentially affect you.
If you’re going to lend your crypto, only use legitimate, well-established lending platforms. Read the fine print so that you’ll know whether an exchange will protect you from certain events and, if so, how. Some of these lending platforms, for example, will offer insurance policies.
You can also lend and get your interest paid in stablecoins or fiat currency. Stablecoins are backed either by the dollar or gold, so they’re in a good position to withstand volatility.
While there are plenty of risks that come with crypto lending, those could be well worth it to you in terms of the potential return on your investment. You could wait until there’s more regulatory clarity, but in doing so, you could miss out on opportunities as well.