Bitcoin lending can be a channel for a steady passive income stream. The best way to understand how a person can make BTC lending work is seeing the parallel with the real estate market: investors buy real estate and rent properties out; so can investors buy bitcoin and "rent them out" too.
BTC lending is straightforward: do your due diligence and study the field, learn how the process works, spread the risk and get started. In this article, there are sections on how bitcoin lending works (process & operations), how to get started, what are the best bitcoin lending sites and some top tips on lending bitcoins.
If you can't wait to try it out, check Bitbond right away.
This article focuses on the safest way of lending bitcoin, which is margin lending. P2P lending is a real albeit riskier alternative that is not covered because is not a "real estate rental income equivalent". It is more like payday loans or Personal Loans. If you are interested in borrowing bitcoin, visit this article.
- Do you research on loaning out bitcoins & margin lending risks. You must learn how margin traders work & think.
- Always spread the risk by trading on both Bitfinex and Poliniex which are the best bitcoin lending platforms. Experiment with both and see what works for you
- Learn how the bitcoin lending process works on both platforms. Practice a lot - with small quantities - until you bitcoin lending service.
Lending bitcoins: BTC lending how-to
For Bitcoin Newbies Only
If you know nothing of bitcoin, watch this movie and reach this "explain like I am 5" article and watch this excellent video.
How Bitfinex & Poloniex compare
There are many bitcoin lending platforms that are considered by people to be the "best bitcoin lending sites". Although each of these have their advantages and disadvantages, in order to take advantage of bitcoin lending the correct strategy is to work with at least 2 of these bitcoin lending platforms. This is the most effective way to defend yourself from a hacking event. Poloniex and Bitfinex are the most popular for this purpose and here is how they compare.
| Poloniex | Bitfinex | |
| Commission: | 15% | 15%-18% |
| Pairs: | 100+ | 50+ |
| Location: | USA | Hong Kong |
| Mobile app: | No | Yes |
| Support: | Good | Good |
- Bitbond
- YoBit (en, ru, cn)
- Quoinex (jp, en)
- Coincheck (jp, en, id)
- Liqui (en)
- Kraken (en, jp)
Alternatives to Bitfinex and Poloniex
If you are interested in spreading your risk even further, you can loan bitcoins on other platforms. Although not as popular for bitcoin lending, these are reputable and use by hundreds of thousands of people around the world.
Bitcoin lending: an introduction
In order to get what bitcoin lending is all about, the first step is to understand what margin trading is of course, especially if you have a large quantity of bitcoin lying around.
So, margin lending is a process that you can use to loan out bitcoin to margin traders on exchanges. Margin traders are individuals or companies that speculate with borrowed funds so they themselves can earn a profit.
Margin traders are the people that will pay interest on bitcoin loan. When it ends, the principal and the interest is paid back.
- Having funds in an exchange instead of a cold wallet is risky. With hacking events having caused people to lose their funds, it is important to consider the risk of losing it all to criminals.
- Another significant risk is the borrower's collateral not being sufficient if a flash crash happens. This is a real risk, albeit it is yet to happen in real life.
Bitcoin lending: the risks
First, see some interest rates here. For bitcoin lending, interest rates have been at about 8%. These vary quite a bit and that is why you need to check these out carefully.
Bitcoin lending is risky. understand what the risks are before engaging. Determine if the returns weigh in favourably against your personal situation. You can read more about this on here
The risks profile you have to build has 2 main components:
Additional risks that may lead to partial or total losses include forced liquidation events of borrowers, currency depreciation and exchange insolvency. "Do not loan what you cannot afford to lose" is the cliché people wish they had listened to when bit losses come around.
- Account with Bitfinex and Poloniex (spreading the risk is a good idea)
- Funds in both bitcoin lending platforms above
- API access to you can automate the processes (optional)
Bitcoin lending: get started
To start lending bitcoin, this is what is needed:
You can easily create an account with both. With poloniex it takes a bit longer because there is a verification process. Once funds are deposited, you can earn interest immediately.
As an alternative you can try working with Quoinex (one of the world's largest, actually).
- Manual process
- auto-renew assistance
- Lending bots
The bitcoin lending process on Bitfinex
If you want to loan bitcoins, there are 3 ways:
Manual bitcoin lending
Create a loan offer in the funding page. After creating a new loan offer, someone may take out that loan for the interest rates chosen. This is easy to do but it is a hassle because you have to renew the loans and you have to determine what the optimal interest rates are. If interest rates go up after a loan, you can miss on making more profits.
Auto-renew bitcoin lending
If you select auto-renew on a loan, you get rid of the first problem. The result of this is your funds going back to the offer page once it is done. The same interest rates will be used - of course - which means the funds can sit there unused if the rates are too high or you can have an underperforming financial asset if too low.
Bitcoin lending with a lending bot
In order to solve the interest rate problem the way is to use a lending bot. These re-offer loans and also determine the optimal interest based on a mathematical equation.
If you want to make this happen, all you need to do is connect the bot to your exchange. This is done by adding 2 API keys to the bot. These are like a username and a password so the bot can take some data and calculate the interest rates. You can generate these keys by visiting the settings page at Bitfinex. Safety notice: disable trading and withdrawal access on the API keys.
Bitcoin lending: the mathematical equations that make lending bots work
There are different types of bitcoin lending bot algorithms to choose from and it is important to understand how they work and see if how these manage the risk is within what you consider safe. Bitcoin lending bots use models to monitors the loans it created and measures market activity, which when combined with historical data (in some cases) these can make good predictions. As such they are always being tweaked and experimented with by software developers and even by artificial intelligence.
Some of these place microloans everywhere within an order book. Some always place fixed amounts deep in the book. Others use statistics and historical data to help determine future demand (when renewals are likely to happen). It uses average loan holding times, current volumes and a few other important variables.
When a loan expires, the algorithm generates a new loan at the market rate. This happens so to preserve the trader's position in the market and to help predicting demand (and more profits).
- Borrow ETH, say 100. You have to pay it back plus interest sometime in the future.
- Sell the ETH for BTC. Say you get 10 BTC for it, to make things simple.
- Price of ETH falls. Shorters rejoice!
- Buy back the ETH. Because it is cheaper, you only have to spend 9 BTC.
- Return the 100 ETH to its original owner.
- The profit/loss is the difference between the price paid for the ETH. In other words, the amount of BTC you got for selling the ether against what you paid to buy it back. In this case, you got 10 BTC for selling the ETH and bought it back for BTC, so you profit 1 BTC (minus the miniscule interest you paid).
The bitcoin lending process on Poloniex
Another reliable way to get started with bitcoin lending is the Poloniex exchange. It is one the world's largest. Poloniex is good and trusted by its users because it has a robust UI (as far as bitcoin lending platforms go), excellent charts that work on phones and probably the largest selection of alt coins in the market.
What is margin trading applied to bitcoin lending?
There are two basic kinds of margin trading you can do on exchanges like Poloniex. You can long (buy low and sell high) or you can short (sell high and buy low). For example, if you want to short the ETH/BTC pair this is how it is done:
Poloniex makes all of this happen in the background and all of these buy/repay processes are take care of for the user. You press a button to open a short position and another to close it (and book the transaction).
When a user borrows money to open a short position, this is a margin trade. It is, of course, possible to go long by borrowing the bitcoin in this pair's case.
The lender - as mentioned before - makes their money via the interest they receive when they are repaid by margin traders.
Bitcoin borrowers usually go long (expect prices to rise) with borrowers of all other coins usually shorting.
Bitcoin lending: How much can I make
How much one can make with bitcoin lending will depend on a variety of factors, most importantly being the interest rate of each particular cryptocurrency. These fluctuate in accordance to market forces. Bitcoin's rates - for example - have been floating between .02 and .04 everyday. It does not seem like much but these add up quickly:
| Daily Interest | Annual Interest |
| .01 | 3.65 |
| .02 | 7.3 |
| .03 | 10.95 |
| .04 | 14.6 |
| .05 | 18.25 |
If the market is going through a high volatility period, rates can skyrocket to over 1% a day. With cryptocurrencies being a naturally highly volatile market, it is wise to expect this to happen in a regular basis as the market cycles through its pump & dump cycles.
Markets are predictable in that sense. Once prices get on a rising trend, shorters (expecting a dump ) show up in large numbers. They get all the loans and therefore interest rates go up. The more experienced usually make the best out of these cycles because they react faster as prices won't stay up for too long. After the dump, short sellers take their profits home and demands for loans goes down.
It is wise to expect low rates, with the occasional high rate cycles. If an investor does this right, it is possible to average over 10% APR and a lot of people are happy with such numbers. With few exceptions, a 10% profit on an investment is a lot more than what a western bank offers. Plus, this is easier than stressing over trading positions on multiple computer screens all day.
- Automated strategy. Almost no manual work.
- Low risk (assumption is normal circumstances)
- APR is better than a traditional bank
- Lower returns against more bullish strategies.
- Lost opportunities with capital being tied to loans (only if the person is an active trader).
- Exchange can be hacked
Pros & cons of bitcoin lending with Poloniex
Advantages
Disadvantages
Advice:Do not commit 100% of your capital to one strategy. An interesting division for a low experience trader can be keep 20% of capital for regular trading, 20% for collateral for your own margin trading and 60% for lending. The better you are, the more risks you can take, so adjust this accordingly to either side of the equation.
What if someone defaults on their bitcoin loan?
Exchanges have built-in mechanisms that liquidate delinquent accounts. All margin trading is done with an account's balance as collateral with the balance determining borrowing limits. If a trade becomes a disastrously high loss of capital, the exchange will close the position and pay back the loan from the balance.
Although possible to fail in theory, forced liquidation is pretty much foolproof and you have 99.999% chance that you will get your money back. This tragic scenario would only happen If prices move so fast that forced liquidation mechanism could not get a good enough price to pay everything back in full. It has yet to happen in the real world.
- Transfer funds into wallet.
Select Balances and them Transfer Balances from the menu. From the screen that appears you will first select the cryptocurrency you want to lend. Then you transfer the amount from your exchange account to your lending account. If a currency is not shown, it means that Poloniex does not authorize its use on margin trading. - Put your loan offers out there
Once you have funds in your lending account, click on Lending from the menu and you will lend on a screen with these sections: my balances, loan demands, loan offers, offer BTC, My Open Loan Offers and My Active Loans. These are all important and they will be used. So here we go:- My Balances: This sections shows the capital that is free to invest in each account. You must see a number in the lending column in order to create a new loan. By clicking on any listing on the coin column, you have access to information about that particular cryptocurrency.
- Loan Demands: this section lists interest rates for available loans. Don't bother with this because loans are usually automated with people automatically taking the lowest interest available loans. There are features in place that allow traders to cap rates, so loans with rates above a certain number won't be automatically taken out.
- Loan Offers: this is a list with every loan currently on offer at Poloniex. This gives you a good understanding of the current demand for each currency. You want to be near the top of the list (where the lowest interest loans are) otherwise you won't be seeing much loaning going on.
- Offer BTC: to add a loan, simply fill out the information in this section which sits at the top of the screen. Duration is the max time the borrower has to pay back the loan. This guarantees a data you will be seeing your cryptocurrency back in your account. Auto-renew simply automatically creates a new offer with the same criteria as before
- My Open Loan Offers: These are all the loans that the user has created but are yet to be taken by borrowers.
- My Active Loans: These are your loans that are in the hands of traders. Of course, once a loan is paid back it will be removed from this list (and go back to your Open Loan Offers list if auto-renew is on. Interest earned will appear in your lending account balance. The fees column is the money made with each loan.
Bitcoin lending on Poloniex: step by step:
Let's analise Poloniex's interface bit by bit and talk about all the bitcoin lending methods available to you through the platform.
- Your bitcoin loan rate should be just a tad lower than the current lowest. So, if the current lowest is .0299 make sure your is .0298 or even .029 if you are feeling bullish. If you are instantly undercut this is not a worry because it is likely a bot and it makes no sense to get on a bidding war with a machine.
- Regarding amount: go all in. As previously discussed, you are not to invest your total holdings and certainly should never keep it all in one exchange.
- Duration should be set for 2 days. If rates spike you will miss out on extra profits. If the market is going through one of its rare spikes (say, around 1%) try to go for 5 or even 10 days.
- Auto-renew on. This way there is no micromanagement involved. If rates rise a lot, just turn auto-renew off and wait yur 2 days until you can offer a new loan at a new higher rate.
- Check your loans everyday and make sure you do not have money sitting there not working for you.
Bitcoin loans with Poloniex: best strategies
Here is a safe methodology do bitcoin margin trading with Poloniex. Remember, these are mere suggestions.
- The basics of the strategy above is a safe bet and as a beginner it can (and should) be followed. With little training it will just become automatic and it will only take a few minutes out of your day.
- Make sure your bitcoin lending strategy is on at all times and do not worry if the rates are high or are not. It will average out to be a good number by the end. Just keep on going.
- It is fine to have many tiny loans open, perhaps in the dozens. It is normal to start out with a few large loans and then fraction these down into multiple rate strategies. This is not a problem. Within Poloniex a person may take a part off your loan anyways, so you start with a big loan and you end up with many smaller loans.
- Read more at Poloniex
