All you need to know about Bitcoin lending.
Bitcoin was the first cryptocurrency to enter the market in 2009. It has attracted many global investors and currently has a market cap of over $500 billion. This crypto has many investment opportunities, but holding it has always been the most popular way users invest in it.
This requires lots of patience and can be unpredictable. Fortunately, you can now lend your held assets to earn quicker and more consistent returns. This article will explain everything you need to know.
What Is Bitcoin Lending?
This refers to lending out your crypto assets for an agreed period to help earn weekly, monthly or annual interest. Bitcoin lending is a fantastic investment, especially if you don’t want to sell your holdings yet. It enables you to earn passive income while your digital assets gain more value in the market.
How Does Bitcoin Lending Work?
Bitcoin lending involves a lender, borrower, and a lending platform. The borrower requests a crypto loan and deposits the required crypto collateral on the lending platform. The crypto collateral helps ensure the lender would be compensated if the borrower defaulted on the loan.
The lender must deposit the crypto assets they want to lend out on a crypto lending platform. The platform is usually in charge of qualifying borrowers for crypto loans, releasing the funds, and paying out interest to lenders.
How to Earn Interest on Bitcoin
To earn passive income through lending, you must invest in a Bitcoin lending platform. However, there are many crypto lending sites today. Therefore, you must research thoroughly to find a trustworthy and reliable platform.
Once you find a good one, check their offers and conditions, then sign up and deposit your crypto assets. The more you invest, the higher the earnings. You should note that how much you can make mostly depends on the platform’s Bitcoin lending interest rates.
After depositing your assets, wait for the agreed period to start receiving interest payments. This period varies with lending platforms. It could be daily, monthly, or even yearly.
How to Choose the Best Crypto Lending Platform
Most bitcoin lending platforms are legit, but they offer varying interest rates and use different lending conditions. Therefore, lending your digital assets to the first platform you find might lead you to unfavorable deals.
Below are the main factors to consider before investing your crypto assets with any lending platform. This will help you pick the right platform for your investment needs.
Crypto lending rates. Although the lending rates don’t vary much, there are still some significant differences. Therefore, look around to help find an investment platform that offers the best interest rate.
The lending duration. Some crypto lending platforms require you to lend your assets for a fixed period, while others don’t have any time limits.
Therefore, choose the lending term that perfectly fits your investment plan. Using a fixed period might limit your earnings, especially if you want to make lending a long-term investment.
Minimum investment amount. Some crypto lending platforms usually allow you to invest any amount, while others have a specific minimum amount. The former is usually the best option, especially if you want to start small.
Regulation. Regulated crypto lending platforms are the best to invest in, as they follow strict rules to ensure your investments are safe. So, you are less likely to lose your digital assets with a regulated platform.
Which Are the Best Crypto Lending Platforms?
Below are some of the best crypto lending platforms that meet the above conditions and more:
These platforms have different lending terms. For instance, Binance has a limited lending period while the rest don’t. Therefore, ensure you check all of them out to help you invest with the best crypto lending platform.
Bitcoin Lending Tax
Most governments have not been welcoming of Bitcoin. Most argue that users take advantage of its anonymous nature to evade taxes. Therefore, tax organizations such as the IRS have been trying to create strategies for taxing crypto transactions.
The IRS has not yet released any specific crypto tax guidelines. But, it has some general guidelines to help crypto investors understand when they owe taxes.
Crypto passive income might put you in a different tax bracket, depending on how much you receive. Therefore, the IRS demands you include these earnings when reporting taxes to ensure you’re taxed based on the correct income bracket.
Since the IRS is still using general guidelines, expect some changes to the current crypto tax rules.
Is Bitcoin Lending Safe?
Bitcoin lending is a safe investment that anyone looking for crypto passive income should consider. However, it also has some risks that you need to know about from the start.
Below are some of the major crypto lending risks:
Bitcoin is among the most volatile crypto assets today. Therefore, you are never sure if your invested assets will bring gains or losses during the investment period.
For instance, you could lend your Bitcoin when it’s worth $60,000 but get it back at $40,000, leaving you at a loss. So, although you will still receive the one bitcoin you lent out, it will have less purchasing power than before.
Smart Contract Risks
Smart contracts are special programs on the blockchain that help govern and automate actions such as collateral liquidations. These programs aren’t perfect as they sometimes contain bugs.
This exposes them to hacks since a cybercriminal might spot the vulnerability and use it to access crucial information or even stored digital assets. Therefore, if the smart contract developers don’t often check for vulnerabilities, you might easily lose your crypto assets.
A lending platform requires indestructible security systems that can keep hackers at bay. Therefore, if a crypto lending platform does not have reliable security, hackers might easily break into the system and steal digital assets. This is not new since some lending platforms, such as Ronin Network, have faced such attacks.
Most governments worldwide are now paying more attention to Bitcoin to ensure no taxable event goes untaxed. The new regulations might also need crypto lending platforms to be insured, registered, and meet other legal conditions to operate.
Some platforms such as BlockFi have already found themselves on the wrong side of these new regulations. So, if your lending platform gets forcibly closed, you might easily lose your crypto assets. Therefore, it is quite uncertain how these regulations will affect crypto lending’s future.
Click here to learn more about Bitcoin lending safety.
How to Stay Safe When Lending Bitcoin
As you have seen, Bitcoin lending involves some risks that can easily leave you in a financial mess. Here are a few tips to help you invest safely and successfully:
Invest with a Regulated Platform
Regulated lending platforms are usually more secure as they have high-end security systems to ensure your investment is safe. Some also have custodians who store their investors’ crypto assets. So, your assets are not stored on the platform, which reduces the chances of losing them to hackers.
Some lending platforms are insured. This guarantees that you would be reimbursed if the platform lost your assets to hacks or any insured event. However, note that the insurance covers specific cases. Therefore, ensure you verify such details before investing with a platform.
Monitor the Regulations
Crypto regulations keep changing depending on the government’s updated crypto laws. These regulations are causing some crypto lending platforms to close shop randomly, leaving investors stranded.
To be safe, always stay updated on new regulations and the platforms they affect. That way, you can avoid investing with the targeted platforms. Doing so will help minimize the chances of losing your crypto assets.
Understand Market Conditions
Bitcoin is volatile. Therefore, if you lend your assets for a specified period, you may not get the chance to withdraw them from volatile market conditions.
So, ensure you understand how volatile Bitcoin can get before lending it. This will help you determine whether you have the required risk appetite for lending.
Pros and Cons of Bitcoin Lending
Advantages of Lending Bitcoin
Bitcoin lending is a simple passive income generator because all you have to do is deposit the crypto and then wait for the revenue.
It offers high-interest rates, enabling you to get great returns.
Some crypto lending platforms allow you to start with small amounts.
There are many lending platforms, making Bitcoin lending easily accessible.
Disadvantages of Bitcoin Lending
Bitcoin lending involves huge volatility. Therefore, there is a high chance you can invest for an entire year and not make any profit or even incur losses.
You might lose your assets to events such as hacks.
It is highly unpredictable due to the frequently changing regulations.
Can You Lend Bitcoin On Ledger?
Ledger only allows you to lend Dai Stablecoin v2.0 (DAI), USD Coin (USDC), and Tether USD (USDT) directly from your hardware wallet. So, you can’t lend Bitcoin on Ledger.
Bitcoin lending is an exceptional investment that has gained lots of popularity recently. You should, however, not invest blindly as it is not risk-free. Hopefully, this article has provided all the details you need to know before starting your lending journey.