So, you’ve finally purchased bitcoin and are excited at the prospect of holding your new asset for the coming years. Once upon a time there would be nothing for you to do with your bitcoin but store it safely in a wallet and wait to sell at the most opportune moment. But now, instead of tucking your bitcoin away and forgetting about it, you can earn interest on your cryptocurrency and grow your digital asset holdings.
Much like traditional fiat currency, you can put your cryptocurrency to work and generate interest via bitcoin lending platforms and/or staking platforms, which provide interest payments in return for lending out cryptocurrency to borrowers.
Lending Your Bitcoin with Interest Accounts
The same principals that allow you to earn interest from financial accounts, like savings accounts, apply to bitcoin as well. When you deposit US dollars into an interest-bearing account, a financial institution will then lend out your deposit to another party at a higher rate of interest. In return for lending your money, you are rewarded with interest payments. This same method of lending also applies to bitcoin.
A variety of bitcoin traders, institutions, and entrepreneurs are constantly looking to borrow bitcoin. Such borrowers rely on lenders to deposit bitcoin into a bitcoin lending platform which provides those lenders interest returns. Lenders receive interest payments while borrowers gain access to capital.
Finding a Bitcoin Lending Platform
In order to loan your bitcoin, you will first have to find a suitable bitcoin lending platform which not only provides you a solid rate of interest for lending out your crypto, but a safe and secure method of doing so. BlockFi has proven to be at the forefront of the bitcoin lending industry, and provides its customers not only with great returns, but advanced security measures as well.
The BlockFi Interest Account (BIA) allows lenders to lend their bitcoin in exchange for up to 6.2% interest annually. All crypto holdings in a BIA are custodied at the Gemini Trust Company, which provides some of the best security in the industry. Deposits are regulated by the New York Department of Financial Services and are provided insurance coverage for assets held in custody.
Additionally, BlockFi is one of the only bitcoin lending platforms to provide compounding interest on account balances, paid to clients in cryptocurrency. Compound interest creates better returns for your deposit, allowing you to grow your bitcoin holdings over time. Customers who wish to earn interest from their crypto with other coins can do so on BlockFi as well, as the platform also accepts Ether and Gemini Dollar deposits on interest-bearing accounts.
Bitcoin lending isn’t perfect, and comes with its own risks. The biggest risk in lending your bitcoin is that of borrower default and/or late payment. Such instances can cause the expected rate of return on lending to decrease, or, in the case of default, result in a loss of investor principal. This has not happened to date.
Crypto Staking Platforms
Much has been made about how to adequately, and efficiently secure blockchain networks. The original method of security employed by bitcoin, known as proof-of-work (PoW), relies on computing power to secure blocks on the chain. However, this has been seen as extremely inefficient and energy intensive, leading to other methods of blockchain security being implemented over time.
One alternative method of securing a blockchain is based on network participants locking-in tokens to validate transaction blocks on the blockchain. These participants are awarded cryptocurrency for securing the network, and penalized if they act maliciously. This method of blockchain security is known as proof-of-stake (PoS).
In PoS there is a type of staking, known as non-node staking, which doesn’t require token holders to validate transactions. Token holders are rewarded in interest simply for holding the blockchain’s native cryptocurrency. Non-node staking doesn’t require any technical knowledge or setup, and has no minimum staking requirement, making it the better choice for the uninitiated cryptocurrency holder.
Interest returns for staking are often advertised anywhere from 1% – 1,000% depending on the cryptocurrency. But don’t get excited just yet, as cryptocurrencies offering such high rates of interest should be met with caution. Fraud and negligence have been uncovered in many cryptocurrency projects, while others with good intentions might not make it out of the market alive. Because interest is paid-out in cryptocurrency, the underlying value of the cryptocurrency being staked is of great significance. A 20% return on a cryptocurrency which is steadily losing its value and won’t exist in one year is effectively useless. Also, you can’t just stake any cryptocurrency, as only blockchains which utilize PoS allow for staking. Therefore, there is no staking option for bitcoin and holders of digital assets that utilize PoW or other methods of securing their networks.
Another downside to staking platforms is its lack of customer service. The decentralized nature of most staking platforms means there is no single entity available to assist customers at any given time. This is a big drawback for customers who want to make sure someone is always looking out for them.
Bitcoin Lending Yield Explained
At the end of the day, you want to put your bitcoin where you are going to get the most return for lending it out. To do so, you may want to look at lending options that provide the most yield on your investment. The yield on a bitcoin loan represents the earnings from the loan over a given period of time inclusive of any applicable fees incurred. For example, a loan that returns $5 on a $100 investment has a 5% yield.
However, yields are often diminished due to the exorbitant fees taken from lenders by financial institutions. In the same scenario, a $2 fee would reduce the yield substantially, down to 3% ($5 return – $2 fee = $3 total return / $100 investment = 3% yield).
Luckily, this isn’t the case with BlockFi, as the crypto lending platform earns only a small spread as a result of each loan. This allows the majority of the proceeds from a loan to be distributed directly to investors.
Furthermore, the beauty of compound interest on a BIA account will increase your yield on your lent out crypto even higher. All returns on BlockFi loans are invested directly back into a BIA account, and in turn growing the account’s investment principal and overall returns.
Because of the ever-changing nature of the cryptocurrency markets, yields can fluctuate and are determined based on market conditions. So, always be sure to see the most up-to-date return and yield information. Be wary of services that guarantee a return. For example, BlockFi’s rates are subject to change.
Finding the Right Bitcoin Borrowers
Bitcoin lenders are only able to earn interest because of the individuals and institutions that are in search of ways to borrow bitcoin or other cryptocurrencies for their own purposes. This means, when it comes to interest returns, it very much matters to whom those funds are being lent. If borrowers are not able to pay back their loan, then lenders will not see the returns they had been hoping for. A bitcoin lending platform, such as BlockFi, will assess the creditworthiness of borrowers and work to drastically reduce instances of missed or late payments. Doing so allows investors to receive higher rates of interest for their deposits.
Individual borrowers can often be tricky to manage and assess, especially when it comes to digital asset lending. For this reason, BlockFi utilizes institutions, and not individuals, as counterparties in crypto loan transactions. These institutions include investment funds, over the counter market makers, and businesses which utilize cryptocurrency in their operations. Such institutions are more trustworthy and likely to pay back their outstanding debts, providing a more secure stream on interest for lenders.
In its vetting process, BlockFi determines the creditworthiness of an institution, and assesses the financial health of the potential borrower. Through its underwriting process, the platform takes into account all types of financial and business data to create a credit profile for the institution. This helps the bitcoin lending platform when it comes to pricing, deal terms, and setting borrowing limits.
Earn Bitcoin with Your Bitcoin
After years of being viewed as a speculative asset, cryptocurrencies are now being taken seriously as a new asset class. As such, financial infrastructure has been created to support the cryptocurrency industry, and allow banking and other financial services that mimic the services already existing in other asset classes.
Doing nothing with your bitcoin and other cryptocurrency is like putting these assets under your mattress. Instead of taking advantage of earning interest on bitcoin deposits, you are wasting a golden opportunity to allow your bitcoin to work for you, and grow your digital asset holdings by simply lending them out to another party. Bitcoin lending is a great way to grow your assets while looking toward the future of the digital currency revolution.