How to earn passive income by lending Bitcoin, Ethereum and stablecoins
(Updated 1/25/2020) Recently there has been an explosion in websites that allow cryptocurrency holders to earn interest on their holdings by lending them out to borrowers. There are two types of services, custodial and fully decentralized ones.
Custodial services take your money, lend it out to borrowers and pay you the interest. You give away control of your funds and have to trust the lending service that they won’t run away with your money. In return, such services offer a streamlined and easy user experience.
In the case of fully decentralized services you never give away custody of your funds as they are stored in smart contracts to which you always have access. In order for borrowers to get your loan they have to put in a collateral of up to 150% of the borrowed amount, to disincentivise them from not paying you back. Such non-custodial services go under the umbrella term of DeFi (Decentralized Finance).
Both types offer attractive interest rates for lenders. Let’s first have a look at some recent annual rates:
Some of the sites above offer additional currencies that can be lent out, such as 0x, BAT etc., but they have been omitted for simplicity. A number of websites offer increased lending rates if the user buys a utility token issued by the site. Usually these tokens have to be locked up (staked) on their respective website to activate the increased lending rate. The idea behind this is to provide an incentive for users to buy and hold the tokens and thus increase their value.
Most of the sites also allow borrowing money but the focus of this article is on earning money by lending. There could be possibile arbitrage opportunities by borrowing money on one platform and then lending it out for a higher rate on an other platform. Changing interest rates and prices as well as loan default risk has to be included in any risk assessment when trying cross-exchange arbitrage. I will not go further into this topic.
In the following let’s have a look at the individual services:
Custodial lending platforms
BlockFi is a website with a very easy UX, allowing the user to deposit their coins (currently supported: BTC, ETH, LTC, USDC and Gemini Dollar GUSD) to their web wallet and accrue interest on them. Currently BTC has an interest rate of 5.1%, ETH a rate of 3.6% and both GUSD and USDC 8.6%. The interest rates for BTC and ETH get lower however after a certain threshold: More than 5BTC accrue only 3.2% and more than 500 ETH only 2.0% interest. Coins can be sent and withdrawn to BlockFi at any time but interest payments are made only once a month. Withdrawal fees are waived for one withdrawal a month. Funds are custodied by the Gemini Trust Company, the issuer of GUSD.
Started by two entrepreneurs and self-proclaimed Bitcoin maximalist out of Singapore in March 2019, Hodlnaut is a platform that provides financial services for individual investors. Through the platform, users can earn favorable interest in their cryptocurrencies by lending them to margin traders, who would otherwise struggle to access crypto loans.
The interest rate for BTC is 6% (effectively 6.2% annually) and 8% (effectively 8.3% annually) for USDC and USDT. There are no minimum deposits or lock-in periods, and users can withdraw anytime. Hodlnaut is one of the emerging players for the crypto lending platform market that aspire to be the leader in the industry.
Read Hodlnaut Review
Hailing from Switzerland, YouHodler is an EU company that focuses on crypto-backed lending with fiat loans option. The platform provides USD, EUR, CHF, GBP, EUR, and stablecoin loans, with collaterals in BTC, ETH, XRP, and other major cryptocurrencies.
It’s good to note that if you don’t have the crypto that you wish to deposit and earn interest from, you can convert from another crypto that you have or fiat currency.
YouHodlers is offering interest rates for stablecoins up to 12% a year (4.8 for BTC annually) and supporting four fiat currencies, six stablecoins, and 15 cryptocurrencies
4 Easy Ways to Make Money with YouHodler
Celsius is an app for iOS and Android with wallets for several crypto currencies. In addition to the ones listed in the table above Celsius also supports DASH, Stellar, ZCash, Bitcoin Gold, Bitcoin Cash, 0x, OmiseGo, Litecoin and Ripple. Interest is paid out weekly on Monday (compounded starting Feb 1st) and coins can be added and withdrawn any time. Interest rates for lending change weekly so keep an eye out for the best rates and coins. Additionally interest can be paid out in CEL token for a slightly increaded interest rate. Funds are secured by BitGo and insured up to $100m.
Nexo is a web-based service currently offering 8% p.a. interest on Stablecoins and Euro. Interest is paiNexod out daily and funds can be added or removed at any time. Bitcoin and Ethereum lending as well as an iOS/Android app are announced. The site also has its own NEXO token which is used to share profits via dividends to token holders. Custody of the funds is provided by BitGo.
The crypto credit card and wallet provider Crypto.com newly offers users to earn interest on their crypto via their new Earn program. BTC, PAX, TUSD, ETH, XRP, and LTC can be added to Earn for different lending rates depending on how long the funds are locked and whether the platform token MCO is staked or not. E.g. locking non-stablecoins for one month or three months accrue 4% or 6% interest respectively. Coins can also be added to Earn without being locked up but this will result in a lower 2% interest rate. All rates can be increased by 2% by staking the platform token MCO for a maximum of 8% interest on your coins (in the case of a 3-month lock-up). Stablecoins yield up to 10% or 12% (with staking) respectively. Unfortunately, the service is not (yet) available Hong Kong, Singapore, Switzerland, Malta, and the USA. Crypto.com uses the Ledger Vault custody solution.
This Canadian Bitcoin only service currently offers an annual lending rate of 3.6%. Payouts are made on a monthly bases and funds can be added / withdrawn at any time. Custody is insured by BitGo.
Bitrue is a cryptocurrency exchange from Singapore which offers a so-called “Powerpiggy Program” where users can deposit funds for 5.3% interest. There are two time windows (rounds) every day when users can deposit either BTC, ETH, XRP, ADA, stablecoins, TRX, HOT and VET. Deposits can be withdrawn anytime and interest is paid out every day. There’s a second program where you can lock away your coins for 30 days and receive a whopping 10.2% APR, but you’ll need to own 4 BTR tokens for each USD worth of coins you want to invest. The exchange promises a guarantee of up to $1m in case of any hack or security breach.
Simply keeping BTC on this asian exchange is currently rewarded with 2.21% annual interest. Holding USDT and ETH gives you 3.71% and 1.47% respectively. You can also buy in into their “Fixed term investment”, where your money is locked up for at least one day (depending on coin) but where it can be kept on indefinitely for higher interest rates. Rates are adjusted occasionally and are currently 6.57% for BTC, 4.38% for ETH and 12% for USDT. Not much is known about Hotbit’s custody system except that they claim to have established “partnerships with top security companies”.
Bitfinex has been offering margin lending for a long term. Users of the exchange can provide liquidity for margin traders and earn interest on the provided funds. Interest rates change quickly based on the current market situation and can sometime reach very high levels of up to over 50%. However such rates usually are usually short-lived and tend to go back to single digit percentages. Funds can be lent for 2–30 days, during which they cannot be taken out of the loan. In case of high interest rates it makes sense to lock-in the rate with a 30 days loan. Borrowers(margin traders) however can close their position at any time, so the 30 day period is not guaranteed. Bitfinex has a history of hacks and loss of funds, but so far users have always been reimbursed using creative financial engineering.
Poloniex is one of the earliest altcoin exchanges and, as Bitfinex, has been offering margin lending for many years. The principle is the same, so lending rates can vary considerably. The website claims to have insurance coverage of the crypto assets on the platform.
Binance Lending is a service that allows users to put their coins into 14-day slots during which they can earn interest. Slots are filled up quickly so you have to watch out for openings. Compared to the other offerings, this one is less convenient, because of the very rare opportunities during which coins can be added to the service. They also offer a new “Flexible Deposit” service which only yields 0.8% interest for BTC, but allows depositing and withdrawing at any time.
Coinbase offers interest on deposits of the stablecoin USDC at a modest 1.25% APY. There’s insurance coverage for crypto holdings up to $255 million provided Lloyd’s of London.
Non-custodial services (DeFi)
Nuo is a decentralized peer-to-peer debt marketplace that enables anybody to lend or borrow cryptocurrencies through non-custodial smart contracts and no platform fees. Nuo currently supports ETH, DAI, USDC, TUSD, MKR, BAT, LINK, KNC, REP, ZRX and WBTC. WBTC is a ERC20 tokenized coin pegged to Bitcoin, which allows to use decentralized DeFi services on Bitcoin. It’s not completely trustless though as you need to trust the issuer of WBTC to not lose their BTC reserves. By depositing crypto to Nuo you can earn interest on your funds without ever giving away control over them. Deposits and withdrawals can be made at any time.
Dharma is a service that’s similar to Nuo. It features a very user-friendly interface and has attractive interest rates for stablecoins. The Ethereum rate is a bit low, but as with Nuo, there’s no custodial risk at all and you never give away control of your funds.
Lendf.me is a simple service for lending and borrowing four different coins. It’s the only service that offers lending of imBTC, a new BTC pegged token that can be issued within the imToken wallet. The token itself bears interest just by holding it and lending it out on Lendf.me should further increase your profit. Both interest rates are around 1%.
Compound provides non-custodial lending of BAT, DAI, ETH, AUG, USDC, WBTC and 0x. The stablecoin interest rates are interesting, so this site offers another possibility to earn on your crypto in a non-custodial way.
dYdX is a DEX platform that allows lending, borrowing and taking custom margin positions. Also here, leding rates are best for stablecoins. Funds can be added and withdrawn at any time.
Fulcrum is a non-custodial lending platform supporting SAI, DAI, USDC, sUSD as well as WBTC. It currently has the highest lending rate for WBTC at around 1.5% APR.
Many of us have various cryptocurrencies and tokens lying around on different wallets. Instead of sitting there idly they could be earning money for you. Due to the relative novelty of the above mentioned services it would be prudent to not put all of your savings on them and spread risk across multiple sites and currencies. Stablecoins e.g. could be invested on one of the mentioned DeFi sites with no custodial risk. They come with some risks of themselves though. As seen with USDT (Tether), the 1:1 backing of USD can be problematic at times if accounts are frozen etc. The algorithmic stablecoin DAI does not have this risk, but is a new concept and yet has to prove its long-term stability.
Ethereum has higher lending rates on centralized services such as BlockFi or CRED compared to DeFi site. You have to trust these exchanges though and should always do proper due dilligence before throwing in a lot of money.
Bitcoin lacks smart contract features and thus so far can only be invested in centralized services with all its advantages and risks. The tokenized WBTC could be a way to use non-custodial lending while still retaining the unterlying BTC value. Here however the trust is simply moved from the lending provider to the issuer of WBTC, so this does not remove risk completely.
Whatever you do, do it at your own risk and don’t put in more money than you can afford to lose. I am quite confident that with proper allocation of some of your funds to several of the services above (to spread risk) you can significantly increase your coin holdings. Usually I hear “this is not investment advice”, but in my case here, it is.
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