Many people buy cryptocurrency intending to hold it for a while. This has led to plenty of people wondering how to earn interest or passive income on their cryptocurrency. Crypto lending is one of the possible solutions, and it has grown in popularity. Now, many platforms offer cryptocurrency lending and borrowing.
How Does Crypto Lending Work?
The basics behind lending cryptocurrency are the same as lending any other type of asset. The lender temporarily gives the borrower a set amount of cryptocurrency. After a specified amount of time, the borrower returns the amount borrowed, along with interest.
On one side, those who participate in cryptocurrency borrowing can have crypto for a short period of time without any hassles. On the other side, crypto lenders earn interest on cryptocurrency that would otherwise just sit in their wallet.
How to Lend Crypto?
When you choose to lend your crypto, the exact process will vary slightly depending on the crypto lending platform you choose.
In most cases, you, as the lender, will choose the amount of cryptocurrency you are willing to loan and the interest rate you want. Borrowers on the platform will register and look for crypto loans they are interested in. Many platforms require the borrowers to deposit collateral of some sort, such as a fraction of the crypto’s value in crypto or fiat. From there, the borrower can apply for loans that meet their requirements. Some platforms let lenders individually approve crypto loans, while others will automatically approve those that meet the requirements of both parties.
The collateral that the borrower leaves is there in case they do not return the borrowed cryptocurrency.
Why Do People Engage in Crypto Lending?
There are plenty of reasons that people choose to use cryptocurrency lending.
Most people store their cryptocurrency in wallets. In those cases, it just sits there, and any variations in value will be due to the crypto’s value changing, not the number of crypto increasing. If you are not going to use the cryptocurrency anyway, lending offers a way to earn interest on it. In other words, you would start with 100 BTC and end with a larger number of BTC, depending on the interest rate, in a few years.
Compensate for Volatility
Cryptocurrencies are notoriously volatile. While this can be beneficial, it can also bring down the value of your currencies. The ability to earn interest on your cryptocurrency helps balance out any drops in the crypto’s value. This can help you minimize losses and maximize profits.
Risks Associated With Cryptocurrency Lending
While lending your crypto can bring in interest, it also comes with risks.
The biggest risk is the potential to lose your crypto if you did not lend it through a reputable platform or to a reliable person. All cryptocurrency transactions are final, so you cannot simply reverse the transaction if the borrower does not pay you back. Most platforms overcome this by requiring the borrower to deposit collateral, but not all have that requirement.
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As with any other time you store your cryptocurrency on a third-party platform, there is always a risk of a security breach or hacking, causing you to lose your funds. You can reduce this risk by choosing a crypto lending platform with a strong reputation and good security practices.
You can also divide the risks into two categories, depending on whether you are using a custodial or non-custodial lending platform. If you use a custodial lender, you have to deal with counterparty risk. This is the risk that too many borrowers on the platform will default. If you use a non-custodial lender that relies on decentralized protocols to allow lending, there is a technical risk. That risk is that the lender’s algorithms will fail, or a hacker will access the system.
An Alternative to Crypto Lending for Profit: A Crypto Savings Account
If you want to take advantage of the interest rates associated with crypto lending to make a passive income but are concerned about the risks, there is an alternative: crypto savings accounts.
Crypto savings accounts use a straightforward process. You deposit your cryptocurrency into the account, and it earns interest. Some of these platforms require you to lock up your cryptocurrency for a set period of time. Some of the best crypto savings platforms offer incredible interest rates, although you can always expect some variation based on the market.
Similar Interest Rates
In many cases, you will earn a similar interest rate with a crypto savings account to what you would by lending cryptocurrency. You may even earn a higher interest rate, depending on the loans and the savings account.
No Lock-up Required
Most people who choose to lend cryptocurrency or deposit it in a savings account do so because they don’t plan on using it anytime soon. But what happens if you change your mind? If you lend your cryptocurrency and want it back sooner, you likely have no option other than to wait. You may be able to contact the borrower and see if they can return it earlier, but this is unlikely, and you would probably forfeit your interest if it was possible.
Some crypto savings accounts have lock-up periods, which offer a slightly better but similar scenario. You can technically withdraw your crypto before this period ends, but you would forfeit any interest earned.
What sets a crypto savings account is that a handful of platforms, like Haru, do not require lock-up periods. This means that you can withdraw your cryptocurrency whenever you want, without any penalties. If you do opt for a lock-up period with Haru, you can get an even better interest rate.
There is also significantly less risk associated with crypto savings accounts compared to cryptocurrency lending. Reliable platforms offering these accounts, like Haru, use low-risk methods to consistently make a profit. There is no risk of the borrower defaulting like you would have to worry about with a loan. The best companies not only use lower-risk investments, but those investment decisions are made by experienced professionals, further reducing your risk.