{"id":1941,"date":"2019-10-24T09:16:02","date_gmt":"2019-10-24T09:16:02","guid":{"rendered":"https:\/\/paybis.com\/blog\/?p=1941"},"modified":"2024-05-20T11:31:41","modified_gmt":"2024-05-20T11:31:41","slug":"bitcoin-lending","status":"publish","type":"glossary","link":"https:\/\/paybis.com\/blog\/glossary\/bitcoin-lending\/","title":{"rendered":"Bitcoin Lending"},"content":{"rendered":"\n

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. <\/span><\/p>\n\n\n\n

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.<\/span><\/p>\n\n\n\n

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.<\/span><\/p>\n\n\n\n

There are different ways to borrow or lend Bitcoin, but before we go into the details, let\u2019s first define the term. <\/span><\/p>\n\n\n\n

What is Bitcoin Lending?<\/span><\/h2>\n\n\n\n

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. <\/span><\/p>\n\n\n\n

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. <\/span><\/p>\n\n\n\n

When talking about Bitcoin lending, we usually refer to a process that involves the following options:<\/span>
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  1. The ability to borrow Bitcoin for margin trading<\/span><\/li>\n\n\n\n
  2. Lend Bitcoin for margin trading<\/span><\/li>\n\n\n\n
  3. Borrow Bitcoin for personal purposes<\/span><\/li>\n<\/ol>\n\n\n\n

    The first two options include a term that you might be unfamiliar with – Margin Trading. <\/span><\/p>\n\n\n\n

    Let’s explain this term before going further, as margin trading is a <\/span>unique trading method that allows confident traders and \u201cgamblers\u201d to increase their potential profits by a large margin. <\/span><\/p>\n\n\n

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    What is margin trading<\/span><\/h3>\n\n\n\n

    Margin Trading is a form of “borrowed trading”, that lets you <\/span>leverage<\/span><\/a> assets you already own to purchase additional assets or access a convenient line of credit. <\/span><\/p>\n\n\n\n

    It allows traders to access larger sums of capital and allows use it to realize larger profits on successful trades. <\/span><\/p>\n\n\n\n

    Where in traditional stock markets the borrower would be a stockbroker, on cryptocurrency exchanges, funds are provided by other traders. <\/span><\/p>\n\n\n\n

    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. <\/span><\/p>\n\n\n\n

    Here\u2019s an example of how it works:<\/b><\/p>\n\n\n

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    Margin Trading Example 1<\/h3>\n

    Assume you want to buy 1 BTC at $10.000USD per coin, but only have $5.000USD available.<\/p>\n

    With margin trading, you can use your $5.000USD and borrow the remaining $5.000USD \u201con margin\u201d from the exchange that supports margin trading.<\/p>\n

    You can now purchase the 1 BTC with your original $5.000USD plus the $5.000USD on margin. With a regular account, you would need the full $10.000USD to make your purchase.<\/p>\n

    Next, let\u2019s assume that the price of Bitcoin rises to $11.000USD and you sell it at that moment. You will repay your $5.000USD loan and at the same time make a profit of $1.000USD.<\/p>\n

    That\u2019s a 20% increase in your initial investment of $5.000USD while the price of Bitcoin only rose by 10%. If you had invested the full $10.000USD on your own, your gains would have been of only 10%.<\/p>\n <\/div>\r<\/div>\n\n\n

    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.<\/span><\/p>\n\n\n\n

    Here\u2019s a second example:<\/b><\/p>\n\n\n

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    Margin Trading Example 2<\/h3>\n

    Let\u2019s take the same situation, only this time we assume that Bitcoin\u2019s price falls to $9.000USD instead.<\/p>\n

    Your equity of $5.000USD would then fall to $4.000USD, because when margin trading you lose your own investment and not the borrowed assets.<\/p>\n

    This means that you are now at a 20% loss on your initial investment from a 10% market move.<\/p>\n <\/div>\r<\/div>\n\n\n

    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. <\/span><\/p>\n\n\n\n

    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. <\/span><\/p>\n\n\n\n

    Borrow Bitcoin for margin trading<\/span><\/h2>\n\n\n
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    Some cryptocurrency exchanges propose margin trading to their users. What does this mean?<\/span><\/p>\n\n\n\n

    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. <\/span><\/p>\n\n\n\n

    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. <\/span><\/p>\n\n\n\n

    Let\u2019s go through a similar example to the one we used for the general explanation for margin trading: <\/span><\/p>\n\n\n

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    Margin Trading Example 3<\/h3>\n

    Assume you own 0.5BTC and want to purchase 1BTC worth of Ethereum (ETH).<\/p>\n

    You would then borrow the additional 0.5BTC from the exchange and purchase 1BTC worth of ETH.<\/p>\n

    Now, on most exchanges, you will have to pay an interest rate on these borrowed BTC. For example, on Binance, the interest rate is 0.02% on a daily basis, which is billed to you hourly. You will have to pay this interest until the moment you repay the 0.5BTC that you borrowed.<\/p>\n

    So, the next action should be to sell those ETH back for BTC, repay your debt and profit from the whole process.<\/p>\n

    Let\u2019s assume that the price of ETH rises by 3%, you sell it back to BTC, and make a profit of 0.03 BTC. You can now repay your loan and enjoy a 6% return on your initial investment!<\/p>\n

    More specifically, you now own 0.53BTC,\u00a0which is a net 6% increase from 0.5BTC<\/strong><\/p>\n <\/div>\r<\/div>\n\n\n

    In a real-life scenario, you would also need to add the trading fees of the exchange, as well as the interest rates. <\/span><\/p>\n\n\n\n

    On the flip side of that example, if you made a loss on your ETH position, you wouldn\u2019t 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. <\/span><\/p>\n\n\n\n

    Here\u2019s a video that explains the process on Binance, step by step. <\/span><\/p>\n\n\n\n