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What is Crypto Margin Lending?

by Steven Weru
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what is crypto margin lending

Crypto margin lending is an almost risk-free way of earning a passive income from your cryptocurrencies. It is the practice of loaning out your Bitcoins and other cryptocurrencies through crypto lending platforms and exchanges to traders at an interest.

To understand Bitcoin margin lending, let’s first get an idea of how regular margin lending works.


How does regular margin lending work?

Margin lending in the traditional securities markets entails a lender loaning money to a trader, who uses the money to buy stocks. After the loan period expires, the borrower pays back the amount borrowed together with the accrued interest.

Let’s take an example of two individuals —Rael and Benson. Rael deposits money to a bank account that supports margin lending. Rael borrows Benson $1500 to buy stocks.

After the loan matures, Benson is required to repay Rael’s initial capital together with interest accrued. Benson is obligated to pay the loan back even if he makes losses. Before being issued with the loan, Benson must provide collateral to ensure he can pay Rael, even if he experiences losses.


Crypto Margin Lending

Crypto margin lending follows the same mechanics as traditional lending; the only difference being, rather than loaning fiat currency, Rael loans Benson her cryptocurrencies.

In crypto lending, Rael would deposit her Bitcoins in a cryptocurrency exchange such as Polonex or Bitfinex. Benson, a crypto margin trader, then borrows Rael’s cryptocurrencies at a set daily interest rate.

Benson then uses Rael’s Bitcoins to buy a cryptocurrency whose price he presumes will rise in the future. After the loan period ends, Benson is required to pay Rael her cryptocurrencies together with the accrued interest.  Benson has the option of paying Rael before the loan period ends.


Why venture into crypto margin lending?

Both leverage traders and assets owners benefit from margin lending. To the asset owner—Rael in our case—crypto margin lending allows her to earn cryptocurrencies without necessarily doing anything. Rael allows her assets to earn for her in an almost risk-free method. In the volatile world of cryptocurrency, any method of making money that involves fewer risks is highly welcomed by some investors.  

For Rael, Bitcoin margin lending also allows her to earn money passively as opposed to if she was holding her Bitcoin waiting for them to hit the $ 20,000 mark again.

For Benson—the borrower—crypto margin lending allows him to become a margin trader. Benson can gain additional capital for his trades. If all goes well, Benson tends to enjoy a higher percentage of profits as opposed to if he had used only his crypto assets for the trade.


What happens if things go in Benson’s way?

In an ideal situation, Benson uses Rael’s Bitcoins to buy Litecoin. Over the next few days or weeks, Litecoin experiences a drastic increase in price, which results in Benson profiting. Benson then pays back Rael her Bitcoin plus the interest earned during the period. Benson pockets the remaining profit.


What happens if Benson loses?

This is no concern for the lender. If Benson experiences losses, Rael will still receive her money back plus agreed interest.

Most crypto exchanges and lending platforms have put in fail-safes to protect the lender’s capital. Most cryptocurrency lending platforms have a set liquidation level, which is the point at which a trader is forced to sell to prevent further losses.

If Benson were to experience losses, he would not lose his whole capital. When executing the trade, Benson is required to enter a stop loss order, at which his trade will be closed when his losses reach a certain level.  


Benefits of Crypto Margin Lending

Someone may ask,” why choose crypto margin lending over traditional margin lending?” Other than the obvious high returns from the crypto market, which operates for 24 hours, here are other benefits of crypto margin lending.

  • High-interest rates guarantee high yields
  • Most crypto exchanges offer daily interest rates
  • Many cryptocurrency lending platforms pay interest in Bitcoin, which has been experiencing an increase in value. Your interest increases in value over time.
  • It offers an almost risk-free method of collecting profits from your crypto assets
  • Crypto margin lending is more tax favorable as compared to traditional margin lending.

Risks of Crypto Margin Lending

Like any investment in the financial sector, Bitcoin margin lending is not risk-free. Most of the risks associated with crypto margin lending are theoretical and have never occurred.

However, a large risk of this area of blockchain is if a crypto exchange unexpectedly shuts down; both lenders and borrower’s money can evaporate.


Choosing the right platform

Your profit levels and risk tolerance depend on the exchange or lending platform that you choose. When choosing a crypto margin lending platform, you should consider the following issues.

First, read through the exchanges terms and conditions to learn about the commission rates charged on your interest. Some lending platforms charge high commission rates leaving little profits for the lender.

It would help if you also considered the regulatory frameworks in the country where the lending platform is located. Some countries have accepted crypto trading, while others have outright banned it. Before depositing your savings in the lending platform, familiarize yourself with the regulations in your country and in the state where the lending platform is based.

Another major consideration is the security of the lending or exchange platform. Crypto exchanges have been prone to hacks in the past. When searching for a platform, ensure it is a platform that you trust, and one that is unlikely to go under despite a hack.


Conclusion

Crypto margin lending is the easiest and most risk-free way of earning an income from your crypto assets. If you have some extra Bitcoin or Ether that you do not currently need, margin lending can be a good way to earn from these.

Margin lending is also an option for those still learning how to trade cryptocurrencies. With Bitcoin margin lending, you do not have to worry about the challenges that come with trading. These include analyzing markets, and the losses that come from the highly volatile crypto market.

Despite the benefits, some caution is necessary before putting up your money, especially for online transactions. Conduct due diligence for the platforms you wish to deposit your money on.

Always remember, never put up money that you can’t afford to lose.

If you’re interested in this area, why not check out your related post: what is crypto margin trading.

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