A new topic is getting trendy these days – the Bitcoin Lending, secured by cryptocurrencies. The loans are becoming an opportunity for investors, miners, hedge funds, and people who don’t have a bank account, to improve their finances by earning interest on their Bitcoin holdings.
How does it work? Well, the concept is quite simple: you become the lender by providing bitcoins and receive interest in return. Imagine that you already have bitcoins or any other crypto-currency. Instead of holding them in your portfolio, you could receive passive income by lending. It is the best way to earn interest on those funds while benefiting from a potential price increase.
Wherefrom does the return come?
To prevent becoming a victim of a lending scheme, you must ask yourself wherefrom the returns for lending cryptocurrencies come. The difference between the legitimate platforms from the rip-offs is easy to spot. If the platforms don’t make a return, then the payouts to the crypto-currency lenders are a pure Ponzi scheme that will implode.
The people who borrow the Bitcoins from you usually use them on crypto exchanges as collateral when trading directly, using your borrowed Bitcoins as a so-called hedge when shorting or selling options. They have their profit since, when trading, they gain a 10% profit per year and pay you only 5% profit per year. The 5% difference is their profit.
Find a platform that is completely transparent about how the return is generated and what costs or fees are incurred by the lender.
What do the interest rates depend on?
The question now is how the different lending platforms differ from each other. Also, it depends on how volatile a coin is itself. Popular crypto coins such as Bitcoin are less volatile than smaller ones and can later provide a lower yield. In the long term, there are much more stable and secure cryptocurrencies.
Also, it depends on whether a platform deducts a lower or higher fee for itself from the profits or whether it even supports the return on investment via marketing measures. You see, here is the gray area between a legitimate platform - implements the marketing measures in the long term, and a rip-off - goes bankrupt relatively quickly.
At last, the decisive point is how many third parties are between the lender and the borrower. If more, then a lower return there is for the lender.
What are the risks of lending your cryptocurrency?
Of course, there are also risks involved. The main for Bitcoin lending is the lending platforms on which the Bitcoin lending is done. It is a bit different than a regular crypto exchange. Of course, everyone hopes to realize, in the future, a safe, decentralized system where you can lend coins and still be in control.
You have to choose wisely the platform for your Bitcoin lending. Search for the best crypto interest rates, but be aware of the dangerous – generous offers. Take, for example, Bitconnect which, offered a 1% return per day and ended being a Ponzi scheme. The initial offer Despite all the warnings, many people lost their money.
Bitconnect multiplied volume within a few weeks and the crash within a few days.
All lending platforms have the risk of something going wrong. Even the platform Binance lost over 60 million US dollars in customer funds in 2019. So, it’s essential, as customers, to have some insurance, external or internal. Internal insurance looks better in theory, being a guaranteed fund as the platform does not have to negotiate with an external party whether an insurance claim is valid. So, choose a platform that offers such an insurance service. Take, for example, the same Binance’s case, who was able to refund all their customers with internal insurance.
Would you invest your crypto assets in a Bitcoin lending platform?