Since its release in 2009, Bitcoin has gained an incredible amount of value, especially when measured against traditional currencies, like the US Dollar. This increased value has turned it into something much more than just a digital, peer-to-peer currency.
Today, Bitcoin is primarily used as a store of value. This means that the digital coin is used much like gold and other precious metals. Considering the state of the market right now, it is understandable why Bitcoin enthusiasts are hesitant to sell or use their Bitcoin, given that its value could increase at any moment.
Additionally, when you participate in the Bitcoin network, you are your own private bank. This means that you can also lend or borrow bitcoins to potentially make even more profit. This makes Bitcoin lending both a passive source of income and a way to make the most from your successful trades.
There are different ways to borrow or lend Bitcoin, but before we go into the details, let’s first define the term.
What is Bitcoin Lending?
Bitcoin lending is the process of lending your Bitcoin to other traders for a given period of time, acting as a personal bank. By keeping their Bitcoins as collateral, borrowers pay back their dues with a set interest over a predetermined timeframe.
Similarly to a bank loan, Bitcoin loans can be repaid either in full or by following an installment agreement between the lender and the borrower.
When talking about Bitcoin lending, we usually refer to a process that involves the following options:
- The ability to borrow Bitcoin for margin trading
- Lend Bitcoin for margin trading
- Borrow Bitcoin for personal purposes
The first two options include a term that you might be unfamiliar with – Margin Trading.
Let’s explain this term before going further, as margin trading is a unique trading method that allows confident traders and “gamblers” to increase their potential profits by a large margin.
What is margin trading
Margin Trading is a form of “borrowed trading”, that lets you leverage assets you already own to purchase additional assets or access a convenient line of credit.
It allows traders to access larger sums of capital and allows use it to realize larger profits on successful trades.
Where in traditional stock markets the borrower would be a stockbroker, on cryptocurrency exchanges, funds are provided by other traders.
This trading method is not designed for a specific type of customer and may be right for any investor looking for additional leverage in their investment.
Here’s an example of how it works:
Pretty neat, right? While leverage can be a powerful tool when the market moves in your favor, it is also important to recognize its risks.
Here’s a second example:
So, you now understand how one would want to use this trading strategy. After all, the gains can be pretty significant. On the flip side, however, the risks are also bigger, and you can lose a lot more in comparison to traditional crypto-trading.
With the basics of margin trading out of the way, we are now ready to talk in more detail about the different types of Bitcoin lending.
Borrow Bitcoin for margin trading
Some cryptocurrency exchanges propose margin trading to their users. What does this mean?
Well, for the borrower, it means that, by using their Bitcoin as leverage, they can use a larger trading sum and hopefully increase their profits.
When trading on a cryptocurrency exchange that supports margin trading, your regular trading account will be separated from your margin account. This way, you can clearly see how much equity you possess (your available funds) and how much you have borrowed from the exchange.
Let’s go through a similar example to the one we used for the general explanation for margin trading:
In a real-life scenario, you would also need to add the trading fees of the exchange, as well as the interest rates.
On the flip side of that example, if you made a loss on your ETH position, you wouldn’t be able to repay your BTC loan and the interest rates would keep on piling up. So be sure you know what you are getting yourself into before starting margin trading.
Here’s a video that explains the process on Binance, step by step.
Keep in mind that trading, especially a high-risk method like margin trading, requires a good understanding of technical analysis and other indicators. You must also have a well-developed emotional intelligence to avoid stress-related mistakes.
Bitcoin is the most popular cryptocurrency and usually has the most trading pairs on different cryptocurrency exchanges. This means that it can be sold or bought with different cryptocurrencies or traditional currencies like USD or EUR.
For that reason, Bitcoin is a great asset to utilize when margin trading. Not only will you be able to diversify your portfolio but you will also increase your chances of making a profit when trading.
Well, that’s about it when it comes to margin trading.
Due to its risky nature, this trading method might not be for everyone.
Moreover, it is generally considered unfriendly for beginners as it demands skill and experience in crypto-trading.
Moving on, if you already own some Bitcoin, you can make a pretty penny through Bitcoin lending. Let’s see what that option is all about.
Bitcoin lending for margin trading
As we previously analyzed, margin trading can be a very profitable strategy when fully understood.
However, there is a more conservative, low-risk process called margin lending. Exchanges like Bitfinex propose this feature.
If you are a Bitcoin holder that isn’t willing to trade your coins for profit, this would be the next best option. By using this feature you lend Bitcoin to other traders. In return, you receive interest, which makes it a great source of passive income. Remember how we spoke about borrowing BTC for margin trading? Well, now, you will be the one giving your Bitcoin to margin traders.
This, of course, entails that you keep your coins on the exchange itself, which comes with its own risks. For example, exchanges can be hacked or go bankrupt, often resulting in a total loss of your funds.
It is always best to not put all your eggs in one basket. However, if you want to earn money from your Bitcoin holdings, this is one of the most effective ways to do it.
On Bitfinex, there’s a “funding” platform, where you can choose which of your holdings you are offering for lending.
So, once you have some Bitcoin deposited on Bitfinex, you can choose the interest rate, amount of BTC and the number of days of your offer. Once the duration of your loan expires, you will no longer receive interest from it, and you will have to renew it.
Check out the video below to understand how the lending system on Bitfinex works.
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All in all, this is a pretty simple way to gain some interest on your Bitcoin holdings, without much effort or risk involved.
Now that we have explored both ways of making profits with Bitcoin borrowing and lending for margin trading, there’s one more type of loan we should mention.
Borrow Bitcoin for other purposes
We’ve previously explored the advantages of Bitcoin as an investment and currency. The main ones being:
- Ease of use – once you get the hang of it transferring BTC from one place to another is a breeze. Transactions are quick and fees are low.
- No 3rd parties involved – The peer to peer nature of Bitcoin helps to avoid banks altogether. You are always in control of your funds.
- Store of value – Even considering that Bitcoin’s price is quite volatile, it has proven that it has the potential to grow over a long period of time.
You could argue that there’s a lot more to Bitcoin than just its value as an asset. Merchants across the world have started accepting it, and like with a cash loan, you might want to consider it for big personal expenses. People have been known to buy homes, cars or travel the world with their Bitcoin.
That’s one of the reasons we’ve seen quite a few Bitcoin loan companies emerging in the past few years. Some propose fiat loans for Bitcoin collaterals, others offer interest on the investment of your Bitcoin.
A lot of people are not too keen on selling their Bitcoin. Taking a cash loan with your BTC as collateral effectively allows you to access a cash line and slowly repay your BTC with interests.
Let’s check some of the most popular Bitcoin loan platforms and if you should consider borrowing from them.
Best Bitcoin Lending Platforms
Here’s a compiled shortlist of the best Bitcoin loan sites, considering their notoriety and user reviews.
CoinLoan is a European P2P platform for loans secured by crypto assets. The service was created to combine and connect borrowers who want to quickly receive fiat money without selling crypto assets and investors who wish to earn interest with minimal risk.
The main advantage of the platform is that each user can become a lender or a borrower on their own terms.
Nexo is a blockchain-based overdraft system that allows users to make instant crypto loans. At the same time, they can access the value of their crypto assets.
Nexo was created by Credissimo, a leading FinTech group that has been serving millions of users from all over Europe for more than a decade.
Unchained Capital is a blockchain financial services company that lends cash to long-term crypto holders. It offers cash loans to long-term cryptocurrency holders in a secure, fast, and transparent manner, backed by multi-signature cold-storage custody solution.
The basic idea of what Unchained Capital is to allow crypto investors to diversify their holdings into other asset classes by putting Bitcoin or Ether as collateral in return for U.S. dollars.
Based in New York, BlockFi is a secured non-bank lender. It offers USD loans to crypto-asset owners who collateralize the loan with their crypto assets.
Their products bring additional liquidity to the blockchain asset sector and meet the needs of both individuals and institutions holding blockchain assets. BlockFi holds clients’ Bitcoin and Ether with a registered custodian and issuing loans in USD to their bank accounts.
Similarly to Coinloan, they propose an interest-earning scheme in addition to their borrowing platform.
Celsius Network was founded in 2017 with the mission to harness blockchain technology to provide unprecedented financial freedom, economic opportunity, and income equality for the 99%. According to Celsius.Network it’s time to replace the current financial systems with a new model that only ever acts in the best interest of the community.
They also claim to have one of the highest returns on investment so it’s advised to read a few reviews and case studies to see what other users say about their service.
These are only some of the platforms you can use to borrow Bitcoin or cash using crypto as collateral.
Next, we should analyze the pros and cons of lending and borrowing Bitcoin.
Is Lending Bitcoin a good idea?
We’ve seen throughout this article that Bitcoin lending can be a good source of passive income.
However, nothing comes without its own set of risks.
For example, we saw how margin trading can be a very risky venture. This is especially true if the market doesn’t go in the direction you hoped for. If you lose your equity, you won’t just lose your money. You will also have to pay back your debt with interest. Additionally, to be successful in this trading method, you will need to get great trading skills.
Furthermore, even when lending Bitcoin, you acknowledge the risk of keeping a good chunk of your holdings on an exchange. We often see exchanges fall prey to hacking, and users losing their money in the process.
Other than that, Bitcoin lending platforms like Nexo or Block.fi have pretty high-interest rates. This is true for both long and short-term loan agreements. You have to be the judge on how much interest you are willing to pay and if it’s going to be worth it in the long run.
That being said, the rewards are also there to consider.
When margin trading, you are only investing a fraction of the total cost. But when your trades become a success, the profits can be considerable. If you are willing to learn and have the time to do it, becoming a cryptocurrency day trader can be a fun and lucrative venture.
If you want to margin lend Bitcoin, you can see returns on your investment pretty fast as well. This is especially true when you have a considerable amount of Bitcoins on the platform. With limited risk, you can put your precious Bitcoins to work and create a passive income source.
From a risk-reward point of view, those are the points you need to consider. Analyze closely all of these advantages and drawbacks and try to make your own informed decision about Bitcoin lending.
Finally, to summarize everything we learned in this article, let’s go through the main points that you need to remember:
- Bitcoin can be used as collateral to get cryptocurrency loans which you can then use for margin trading
- Margin trading is a high-risk, high-reward strategy that should be reserved for experienced traders
- Some exchanges also support margin lending – You lend your Bitcoin out and profit from the interest rates
- There are many legit platforms that enable you to borrow Bitcoin and pay it back at your pace
- Always weigh out the risk-reward of any investment venture before fully committing to it
We hope that this article has helped you understand Bitcoin borrowing and lending better. As always, let us know if there is anything we should add!