One of the latest trends in the Bitcoin and the greater cryptocurrency community has been the emergence of lending services. More and more platforms are being built that allow users to borrow, lend and earn interest on their cryptocurrency. Over the past couple of years, it has become much easier for cryptocurrency users to earn a return on their holdings, as a number of new crypto lending platforms have popped up.
Cryptocurrency lending platforms operate essentially as brokers between lenders, and borrowers. The general idea is that lenders are able to use these platforms to earn interest on their idle crypto assets, and borrowers are able to take out a loan. Whether a user has Bitcoin, Ethereum, Ripple, or some other crypto asset, they are now able to earn interest on those holdings in return for lending them out to other users. With the emergency of decentralized finance (DeFi), it is possible to lend out cryptocurrency to someone else in an extremely low-trust manner.
Crypto lending platforms allow users to either lend their cryptocurrency holdings, or lend from others. Additionally, these platforms often offer users the ability to borrow fiat currency against their cryptocurrency holdings. In these situations, the user hands custody of their Bitcoin or other crypto assets over to the platform, and the cryptocurrency is held as collateral for a loan denominated in U.S. dollars or the local fiat currency. If the user defaults on the loan, the crypto lending platform can seize the cryptocurrency collateral instead.
It should be noted that a variety of other services unrelated to lending are also usually offered by these platforms. For example, some crypto lending platforms often operate as crypto exchanges.
There are a few different reasons as to why someone would want to borrow cryptocurrency. Let’s take a look at the two main use cases.
For one, if you’re someone who is bullish on the long-term price of a particular cryptocurrency, then you obviously don’t want to sell your crypto assets holdings at any point in the near future. However, you also may need cash on hand to pay for your daily expenditures, such as rent and groceries. One way to access cash for your daily spending habits without losing the potential upside that comes with exposure to the Bitcoin price is to borrow U.S. dollars or your local fiat currency with your crypto holdings as collateral for the loan. Some cryptocurrency miners take this route, as it allows them to pay their electricity bill and other costs of doing business without selling their crypto holdings.
Another reason someone may decide to borrow some cryptocurrency has to do with trading. If you want to short a particular cryptocurrency, then you need to borrow that cryptocurrency from someone else. In simple terms, shorting an asset is basically placing a bet that the price of that particular asset will decline in value. When you short something, you borrow the asset from a lender and then immediately sell it on the open market. The basic idea is that, once it is time to pay back the loan, you will be able to buy back the asset at a lower price and keep the price difference as a profit.
Yes, there are multiple different platforms that will allow you to lend crypto to others. You can gain interest on these holdings and even automatically reinvest that interest into the same lending program. These platforms essentially are giving you the ability to compound your investment.
The interest rates offered on crypto lending platforms are amazingly good compared to traditional banking institutions.
It’s possible to get up to 18% interest in some cases, which is astounding compared to interest rates in traditional brick and mortar banks. Consider that the average savings account in the USA offers a minuscule 0.09% annual interest rate. You might as well store your cash in a shoebox at that rate.
Mutual funds are considerably better but even they tend to top out around 5%.
How are crypto lending platforms able to offer such lofty interest rates? That’s a common question. There’s speculation that the lending platforms are offering rates this high as an introductory price to acquire new customers. The rates may not stay that high in the future.
It’s worth noting that there are a variety of factors that affect your interest rate. Things like:
Much like any other part of the crypto industry, there are definitely scams that operate in the crypto lending space. In fact, promises of high returns on people’s Bitcoin holdings was one of the scams that happened quite frequently on the Bitcointalk.org forums in the early days.
That said, the crypto lending industry has come a long way since the Wild West days of early Bitcoin companies. There are now reputable crypto lending platforms available that are completely above-board and regulated in ways similar to traditional financial institutions. The best way to avoid getting scammed by a crypto lending platform is to avoid shady, anonymous entities that are offering returns that are too good to be true.
Crypto lending platforms have a variety of different ways to make money, but the reality is that these companies aren’t much different from traditional banks. Effectively, a crypto lending platform takes users’ money and puts it to work on various investment strategies. The crypto lending platform then takes a profit via the spread between what they’re taking from one group of users and lending to another group of users.
Whether you can use your own cryptocurrency wallet and keep control over your own cryptocurrency while using a crypto lending platform will depend on the nature of that lending platform. There are both centralized and decentralized ways in which users can interact with cryptocurrency lending platforms. Specifically, staking has become a way in which users can earn a return on their cryptocurrency holdings without taking on much risk.
Staking exists in a variety of different forms today. For example, proof-of-stake networks like Tezos allow users to earn interest for performing tasks similar to that of proof-of-work miners in Bitcoin. Additionally, processing transactions on Bitcoin’s Lightning Network or offering liquidity to something like JoinMarket could be viewed as a form of staking.
While staking is meant to be done by an individual user, services like Coinbase also stake coins on their users’ behalf.
There are many crypto lending platforms that also operate as cryptocurrency exchanges. The two businesses compliment each other well as exchanges offer easy on boarding for new cypto users.
Whether you can buy Bitcoin on a crypto lending site will depend on the particular platform in question; however, many borrowing and lending platforms have close relationships with exchanges. Bitcoin is still by far the world’s most popular and liquid cryptocurrency, so if you are able to buy crypto via a crypto lending platform, Bitcoin is likely to be one of the first available options.
The cryptocurrency lending platform is one of the fastest growing segments of the entire crypto industry and there are quickly becoming a large number of options to choose from. It’s important to make sure that you’re signing up with a reliable lending platform because you’re entrusting them with your cryptocurrency.
Here are some of the biggest players in the still growing lending industry:
Crypto.com is a provider of a service called “Crypto Earn”. They provide this service through their mobile wallet application. Although this is a custodial wallet, Crypto.com has been able to achieve a high degree of customer confidence with the levels of security that they’ve built into their system. Crypto Earn allows you to lock your tokens for three different terms, each returning you a different interest rate. The longer the term, the higher the interest rate.
The longest term is 3 months, allowing you to earn 12% APR on stablecoins, 18% APR on their signature token CRO, and 6.5% APR on Bitcoin. Crypto.com offers some of the most competitive and highest interest rates in the entire cryptocurrency ecosystem.
The shortest fixed term is 1 month, which offers you their mid tier interest rates. 10% on stablecoins, 16% on CRO, and 4.5% on Bitcoin.
Their third term is flexible, meaning, at any point and time, you can cancel the term, retrieve your assets, and do what you like with them. The drawback is you only have access to their lowest tier of interest rates. 8% on stablecoins, 14% for CRO, and 2% for Bitcoin.
The payouts occur on a weekly basis, and are deposited directly into your Crypto.com wallet, allowing you to use them as you see fit immediately after the deposit.
BlockFi is one of the leading lending platforms in the cryptocurrency ecosystem. They offer a wide range of lending products. BlockFi creates value in the space by pushing the limits of what is out there, and offering novel lending products such as Automatic Compounding Interest, and Interest Payment Flex.
Interest Payment Flex is the ability to choose what asset you want your interest paid in. This allows you to invest in other cryptocurrencies, and diversify your portfolio, without outright purchasing additional cryptocurrency.
Automatic Compounding Interest is exactly what it sounds like, the interest that you receive from the assets that you are lending, is automatically reinvested in your lending contract, which then increases your next interest payment. This has a potent compounding effect, allowing you to grow your savings at an accelerated rate.
Nexo is slightly different than the previous two that we examined, as they only allow you to lock up, and lend stable coins and fiat currency. On the flip side, they also allow you to lock up cryptocurrencies such as Bitcoin as collateral, to receive a loan in a stable coin or fiat currency of your choice. Nexo has established itself as a trusted name in the space, as they have succeeded in securing Licenses and Insurances for the cryptocurrency stored within their services.
Like Crypto.com, Nexo also offers a crypto visa card that you can load your money onto, in order to spend your proceeds more easily. Having a card that allows users to spend their cryptocurrency, or their proceeds from lending is essential to fuel the adoption of cryptocurrency.
The Celcius Network is all about disrupting the traditional finance sector and are hopeful that they might be able to provide the services that you might find at a bank.
Currently users are able to buy, earn and borrow directly on the blockchain using the Celcius Network, which is a very nice portfolio of features. The site offers very competitive interest rates for customers and you can get up to 12% when depositing your crypto into their wallet.
Like many crypto lending platforms, the Celcius Network offers a proprietary token. In this case the token is called CEL and there are a variety of perks when you hold a certain amount of CEL or agree to get your interest payments in CEL.
On of the most interesting aspects of the Celcius Network is that they are working towards redistributing up to 80% of their revenues back to depositors. In that sense the Celcius Network is reminiscent of a credit union compared to a traditional bank.
It’s important to note that different lending platforms will be better for certain customers. There are some customers who only care about getting the highest possible rate while others are more interested in borrowing some cash for their crypto so they can leverage it somewhere else.
We like to compare cryptocurrency platforms based on all their different features including earning interest, borrowing rates, credit cards, long-term investment, software and more.
Here how some of the biggest players in the industry compare head-to-head: