What is Bitcoin Lending?
Bitcoin Lending is a pretty hot topic, because loans secured by cryptocurrencies are becoming a great way for investors, miners, hedge funds and people who don’t have a bank account to improve their finances by earning interest on their own Bitcoin holdings and thus receive passive income.
The concept as a whole is quite simple:
As a lender, you provide bitcoins and receive interest in return.
If you already have bitcoins or any other crypto-currency and HODL them anyway, lending cryptocurrencies is the best way to earn interest on those funds, while benefiting from a potential price increase.
Of course, there are also risks involved…
Risks: Not all that glitters is gold!
The old saying is true: Not your keys, not your coins. Since the majority of Bitcoin lending is done through crypto lending platforms, you have to trust them just like you would an exchange. In the future, there will be ways, just like Decentralized Finance (DeFi) works on Ethereum, to do the same on Bitcoin, where you can lend coins and still be in control. Projects like DeFi Chain (www.defichain.io/) or Rootstock (www.rootstock.io) are working on this, but they are still a bit in the future and so you still have to trust the lending platforms with your bitcoins as of now.
Here, of course, you have to choose them wisely. A platform could offer the best crypto interest rates, but then run away with your coins — so being too greedy is highly dangerous here. Bitconnect is a good example. The platform offered “returns that were too good to be true” — and they were too good to be true, because in the end the platform was a ponzi scheme. For example, Bitconnect offered 1% return per day. Unfortunately, despite numerous warnings, the rip-off fell through and many people lost their money.
Graph: Bitconnect multiplied within a few weeks and then crashed completely within a few days and most investors lost their investment.
So it will be very important, when I present you 5 proper platforms, that you ask yourself if everything is going right.
Where does the return come from?
First, we have to ask ourselves where the returns for lending cryptocurrencies come from. This is the difference between the legitimate platforms and all the rip-offs. If the platforms don’t make a return, then the payouts to the crypto-currency lenders are a pure ponzi scheme that will implode.
I have also made a video about this, if you prefer: https://www.youtube.com/watch?v=-9oDC0SfXMo
The short version of the explanation is that the people who borrow the Bitcoins from you usually use them on crypto exchanges as collateral when trading. So they do not trade your borrowed Bitcoins directly, but rather use them as a so-called hedge when shorting or selling options. When trading, they make e.g. 10% per year and pay you 5% per year. The difference is their profit.
In theory, there are a few other possibilities, but the basic principle always remains the same.
The best thing to look for, is a platform that is completely transparent about how the return is generated and what costs or fees are incurred by the lender. This way the lender can know exactly that his return does not just come from thin air, but that value is actually created that pays out the profits. Only in this way is a return sustainable over the long term.
What do the interest rates depend on?
The question now is, how the returns between the different coins and also the different lending platforms differ from each other. On the one hand, this depends on how volatile a coin is itself. Large coins such as bitcoin are less volatile than smaller coins and can therefore usually only provide a lower yield. On the other hand, they are much more stable and secure over the long term.
Furthermore, it depends on whether a platform deducts a lower or higher fee for itself from the profits or whether it even supports the return on investment additionally via to marketing measures. Here, there is often a gray area between a legitimate platform, which can implement the marketing measures in the long term, and a rip-off, which goes bankrupt relatively quickly.
The last decisive point is how many third parties there really are between the lender and the borrower. The more, the lower the return for the lender.
Obviously one looks for platforms which are used by only a few third parties and which can pay out the promised interest in the long run.
Can I lose my capital?
Even if all platforms presented are serious, something can always go wrong. Even the largest platform presented, namely Binance, lost over 60 million US dollars in customer funds in 2019. So an important question is always whether there is some kind of insurance, either external or even better internal for customers. Internal insurance might even be better because theoretically, there is a guaranteed fund as the platform does not have to negotiate with an external party whether an insurance claim is valid. So the best thing is to choose a platform that offers such an insurance service — all the platforms presented have this in their own way. In Binance’s case, they were also able to refund all customers with the internal insurance.
The 5 evaluation criteria
Considering all the above mentioned points, I will measure the presented platforms as neutral and objective as possible against the following evaluation criteria:
- Return: too high is bad because it is unrealistic, too low is unattractive
- Transparency: As a customer, do I know where the returns come from?
- Size: How old or how big is the platform?
- Usability: How easy is the platform to use?
- Security fund: Are customer funds reasonably protected?
The 5 best Bitcoin lending platforms
Based on the above mentioned evaluation criteria, only the 5 platforms listed below come into question for me — pretty much all others raise red flags because they either pose massive risks for the customer or they appear to be a ponzi scheme.
- Binance www.binance.com
- BlockFi www.blockfi.com
- Nexo www.nexo.io
- Celsius www.celsius.network
- Cake www.cakedefi.com
Let’s look at the 5 platforms in detail first and then evaluate them in comparison to each other according to the criteria mentioned above.
Binance (www.binance.com) is the largest provider of all and offers the largest variety of coins. However, on the other hand, Binance is not very transparent in terms of returns, and it is often said not to have any real returns but to see the returns purely as marketing costs. The returns and the possible participant slots are correspondingly low: https://www.binance.com/en/lending It is extremely easy to use and especially if you already use Binance as an exchange and don’t look too closely at the relatively low returns, it makes sense to use everything in one place — especially since the customer deposits seem to be quite safe via the SAFU protection fund.
- Everything in one place: Already large exchange with easy use
- Large company with strong financial backbone
- Wide range of coins
- Flexible time limits or fixed
- No transparency
- Slots are usually quickly full
- Low returns
Blockfi (www.blockfi.com) is also an “old dog” in the crypto lending ecosystem. Blockfi is particularly interesting if you want to lend smaller quantities, because Blockfi is co-financed from its own pocket for marketing and offers highly interesting returns: https://blockfi.com/rates/ The crypto assets are stored at Gemini. This third party custodian is a licensed custodian with insurance and has an excellent track record with no hacks or losses of customer funds. In fact, Gemini works with many lending services and other cryptocurrency sites.
- High returns on small amounts of money
- Gemini provides good protection of the deposits
- No limits — further temporally still with the quantity
- falling interest rates, time wise and also on the amount of the deposit, which is due to the expiring marketing budget
- No transparency where the returns come from
Nexo (www.nexo.io) was founded in 2017 and sees itself as the largest crypto lender (https://nexo.io/company). Whether their numbers are really larger than Binance’s cannot be verified. They have almost 550,000 customers and offer a huge number of Fiat currencies including Stablecoins with attractive returns. And this is exactly where the weakness lies: there is no lending with Bitcoin or Ethereum yet. Furthermore, there are often rumors that Nexo lends their money via other peer to peer platforms and third party risks often arise from that. So far, however, these were only rumors and everything seems to be going well. Nexo’s wallets are provided by BitGo and so users are insured for up to $100,000,000.00 at Lloyd’s — a London based bank — in case of a hack or bankruptcy. This amount applies to the entire company, not per person. Since Nexo claims to manage 1.5 billion USD (i.e. 15 times the sum insured), investments are only 7% insured in case of a total loss.
- High interest on Fiat and Stablecoins
- Long track record and high-profile
- No limits or minimums
- No transparency
- Only fiat or stablecoins due to their business model
- Insurance up to 100 million USD, which is however only a fraction of the total amount.
Celsius Network (www.celsius.network) was founded in 2018 by Alex Mashinsky — one of the inventors and patent holders of VoIP (Voice over IP) technology. In contrast to all the others, Celsius did its fundraising partly through an ICO and thus also has its own coin. Accordingly, some advantages are only made via this coin, which can be very annoying in many cases. Celsius Network tries to do a kind of crypto peer to peer lending and to create transparency, but this does not work completely, even if it is a good step in the right direction. The user experience is completely different to all the others, because here you have to do everything via their app — which is always that simple.
- Numerous cryptocurrencies with good returns
- Celsius works with BitGo, and also has the previously discussed $100,000,000.00 insurance with Lloyd’s
- Weekly payment of the interest earned — this is faster than with any other provider
- Partial transparency
- Mobile App only — the user experience is not as good as other platforms.
- Own token sometimes very annoying
- Some minimums for better returns
- Insurance up to 100 million USD, which is however only a fraction of the total amount.
Cake (www.cakedefi.com) is the youngest of the presented platforms and was founded by myself and my co-founder U-Zyn 2019. So even if I am partly biased here, I try to analyze objectively in all points — this can always be checked by the reader herself. U-Zyn and I have many years of experience in the field of cryptocurrency and wanted to hook on the disadvantages of the other platforms and turn them into our advantages. First and foremost, this means offering complete transparency that no other platform does. The motto here is: Trust, but verify. Additionally, since we have excellent contacts, we can eliminate pretty most of the third party partners and thus optimize the returns for our customers and always try to offer the best return on investment. Furthermore, the ease of use is extremely important to us. We also offer a security fund, but it has to be said that we are the youngest platform and of course we have the shortest track record.
- The Highest return of all, because no third parties are used
- Complete transparency
- Simple usability
- Internal security fund, similar to Binance
- The Youngest platform of all presented
- Currently, only Bitcoin and Ethereum on offer — more to come.
- 1 month minimum
So if you summarize the options, you can create the following table:
You can see quite fast: None of the presented platforms is bad, quite the contrary — rather you have to think about what exactly you want:
- Best returns on BTC or ETH: Cake www.cakedefi.com
- Maximum transparency: Cake www.cakedefi.com
- Everything in one place and many coins, but small returns: Binance www.binance.com
- Only have a small amount in USD, BTC or ETH: Blockfi www.blockfi.com
- Best returns on USD or stablecoins: Nexo www.nexo.io
- Have many different coins and like the Celsius Coin: Celsius www.celsius.network
I hope this article helps you to get an insight into the world of Bitcoin and Crypto Lending. Please let me know in the comments which platform you have chosen and why.
Have fun with cashflow from cryptocurrencies