Lending offers us an appreciation of up to 20% of our equity per annum without a bit of trading knowledge.
It’s a way to make money in the world of cryptocurrencies without owning any cryptocurrency at all. I will try to explain to you how lending works and how to grow your money with an interest rate that no bank can ever offer to you.
What is lending and how does it work?
Anyone who has ever traded on leverage has encountered with the term “funding” (the same meaning as lending), which is the basis for creating positions on exchanges with leverage.
If you want to open a $10,000 position on an exchange, but your capital is only $ 1,000, you have to borrow the remaining $9,000. This money doesn’t just suddenly appear, it must be borrowed by the lender and you have to return it with an interest after some time.
Bitmex and similar derivatives exchanges do so by lending equity to speculators automatically and within themselves. The majority of speculators pay the opposite positions to minority traders. So in practice, if we are in a bulltrend and there are more speculators on long, shorts will receive interest for lending cryptocurrency to longs at around 0.03% – 0.2% per day. The greater the dominance of one party, the more % funding. It is important to note that these interests go directly to the traders and the exchange does not even have a satoshi from that.
However, it has its advantages for the exchange as well. It is helping it to maintain a balance between longs and shorts, because if the dominant traders are to pay funding for a position of around 0.2% a day, which is quite common in parabolic trends, it ceases to be profitable for them holding this position. Thus, they start to close the positions, the difference is reduced and the risk of sudden liquidation of a large number of leveraged positions at a steep price movement is reduced.
The goal of this article is to show you a much easier way of lending found on Bitfinex and Poloniex. This type of lending can be used for appreciation with minimal risk. At Bitfinex, lending works by offering your equity in a classic supply/demand style and lenders are searching for a counterparty for their offers from speculators who want to fund their position. You can borrow here either cryptocurrencies held on the exchange to short speculators or USD to long speculators.
The daily interest rates are individual according to the market demand for the cryptocurrency, but the USD itself performs the best in the long run.
Lending in practice
If you are interested in this option, you just need to open a Bitfinex account and follow the procedure below.
1) Deposit cryptocurrencies on your Bitfinex account. You can either continue holding them while lending or you can exchange them to FIAT, which you will protect you against losing value by the price movement of the market.
2) Transfer cryptocurrencies or FIAT from “exchange” to “lending” wallet on the exchange. The exchange distinguishes wallets according to whether you trade without leverage, with the leverage, or if you lend.
3) In the funding tab, click the currency you want to borrow.
4) In the “Auto-renew” window, fill in “0” for the maximum, enter “2” in the “Period Days” box and click FRR in the “Rate % per day” box.
5) The process is finished by pressing the “Activate” button and you are now supplying traders with your equity.
Note: The setting above is ideal for lenders who want to keep the equity on the exchange for longer periods of time and also want to have the possibility to withdraw the equity almost anytime. Of course, it is possible to borrow only fraction of the whole equity, determine the maturity of the loan ranging between 2-30 days and manually check for what interest rate you borrow money, but this mentioned setting is the most effective.
Average annual profits and risk
Thanks to this system you will be rewarded on a daily basis and you will receive passive income. Statistical data indicates that you are able to interest your equity by 19.5% per annum in this mode and get even more thanks to compound interest by setting a maximum loan time of 2 days.
The chart shows daily interest rates in % paid to lenders in 2017
In addition, if you borrow dollars, your risk of loss is almost zero. Why almost? It depends on your personal view of the trustworthiness of Bitfinex in the light of the events of recent months and the general risk of holding capital on crypto exchanges.
We have an alternative here – Poloniex, who also offers this type of funding and it is not engaged in the whole USDT disaster. However, at Poloniex, funding rates do not even reach half the value of Bitfinex.
Warning: The information in this article is for reference only and is not an investment recommendation. Trading cryptocurrencies, options, derivatives, and other products are risky and may result in the loss of your entire capital.