Many crypto traders usually hold on to their assets until there is an appreciation in the price. But while this is the case, it appears that there aren’t many options to help grow your digital currency. Many people who have a lot of digital tokens aren’t content with just leaving those currencies in their wallets. That’s when they start thinking about ways to help grow that cryptocurrency. This is where crypto lending comes into the picture.
Crypto lending is considered one of the popular ways to grow your digital currency and earn some interest in it. However, before getting down to it, let’s first understand what the concept of crypto lending entails and how to lend crypto to other traders.
What Is Crypto Lending, and How Does it Work?
Crypto lending is a way to put your crypto holdings to work. You can lend your cryptos to other users who pay back the sum with some interest. Nowadays, many centralized exchanges offer the option to lend crypto at a fixed rate. You can also directly lend your cryptos to a P2P network or decentralized exchanges.
There are numerous ways to do it, but we’ll explain the more popular ones.
1. You lend your coins to exchanges or traders who need them for margin trading. For borrowing their coins, users will pay you interest. Interest rates can vary anywhere between 10-15% per year on some exchanges, while some lenders give up to 25%.
2. You lend your coins in P2P loans to other users. If you need a loan yourself, you can apply and receive funds from the multiple lenders who participate in the platform – this way, you don’t have to go through a middleman or borrow money from your friends/family. Just put up an open request for a loan on the exchange.
3. Through ICOs (initial coin offerings), where startups sell their tokens in exchange for Bitcoin or Ethereum. Once their coin starts trading on exchanges, they use the raised capital to pay off early investors and also offer dividends.
4. You decide to become part of a lending pool, where you can find friends or other lenders to join forces and become lenders as a whole. If the pool does well, everyone reaps the benefits – if not, people with lower risk tolerance might lose their funds. Diversification is key here, and it’s best advised to lend different coins on multiple platforms.
5. P2P crypto exchanges connect buyers and sellers through bidding systems without having them hold users’ coins – they just facilitate trades between two parties by offering their own liquidity.
6. You can also lend on cryptocurrency exchanges that have margin markets. There are lots of ways to do it, with the most prominent being the perpetual swap contract – where you don’t set an end date for your loaning period. It simply rolls over every 8 hours until you close out the position. The second one is a traditional futures contract, where both parties need to deposit their funds and they pay each other interest depending on how long they hold the positions open.
There are some platforms that have recently started popping up, though, working towards bringing institutional money into cryptocurrencies by offering services for hedge funds.
What Are Crypto Lending Rates?
The interest rate or lending rates are the amounts of money that one party, called the lender, charges to lend funds to another party, known as the borrower. Lending is a concept used in many different contexts. A simple example would be lending money from yourself. You are the lender and are giving your own money to yourself, which you have borrowed for some time, with added interest. The borrower here can also be you since you already have obtained the loaned amount of money. This way, it becomes very easy to understand what happens when more than one person is involved in lending and borrowing transactions
When it comes to crypto-lending, there is a typical yearly yield that should be expected. The annual yield for cryptocurrencies ranges from 3% to 8%, while the Stablecoin rate varies between 10% and 18%. If you want your earnings to be optimized, you’ll need to choose a platform based on the cryptocurrencies you own.
What Are the Benefits of Crypto Lending?
1. A fixed interest rate for a fixed amount of time
This is the most common type of crypto-lending, and it is done on coins that boast a predictable and steady growth in value. This can be important if you understand the basics of trading and know how to play the markets. It also allows you to diversify your BTC portfolio, which will reduce risk, especially if you keep some funds on an exchange (the base currency for most ICOs).
2. Low entry threshold
Individuals who want to participate in lending earn passive income with very low entry thresholds since they don’t need to buy new assets but only make use of what they already own – their cryptocurrencies. The smart contract system that lies in all lending platforms is its key strength. This is because it facilitates fast transactions and manual or automatic withdrawals of funds when one’s earnings reach the threshold amount.
3. The trend in lending is toward more stability
The LEND token, for example, works with ETH (the ERC20 standard token for Ethereum). It means that they are very flexible regarding trading pairs since they can be bought or sold not only with BTC but also ETH, USDT, or fiat currencies like the EURO or the U.S. DOLLAR. This makes exchanges an integral part of increasing your savings in a way that is profitable and safe at once by avoiding any unnecessary risk since you aren’t actually holding the traded asset in your wallet until you sell it back.
4. Fast transactions and withdrawals
There is a common misconception that trading cryptocurrencies carry a significant risk of losing them all since the digital asset market is very volatile. However, lending allows you to make your earnings grow without having to actually hold your funds until you sell them back – this reduces the risk factor for you as an investor.
Once again, smart contracts take care of this process by ensuring immediate execution of trades and quick payouts once your returns reach the withdrawal threshold. This way, there’s no need to wait until after a certain time frame before seeing any profit from your investment – it is paid out automatically thanks to the blockchain technology working behind it.
5. Growing popularity makes crypto-lending a promising investment
Crypto lending platforms have plenty of benefits for users looking for a simple way to grow their earnings without investing in anything but their already existing cryptocurrencies. Once you sign up with an exchange, you can choose between different coins based on the current market trend and easily go back at any point should you decide that this mode of investment is right for you.
The Bottom Line
What makes crypto lending particularly attractive is how easy it can be done through different exchanges. The main thing to keep in mind when you’re ready to start lending is that the cryptocurrency market moves quickly, and no one can say with certainty which way it will go. Another risk you might want to consider is the possibility that the price of your collateral drops along with the virtual coins’ value while you are still holding them for your lender. This could leave you in a tough spot as there are some cases when exchanges may not even allow taking back coins securing loans.
You can also opt for trading strategies through automated trading bots with Mudrex. Mudrex does everything for you, from the exchange through API keys, and does not require any withdrawal permissions. It is safe to say, Mudrex is the high-performing automated trading platform you are looking for.
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