How much can you make with crypto lending?

Crypto lending is one of the best methods of generating passive income with crypto assets in the twenty-first century. But if you have crypto holdings, why would you even bother to lend them? Crypto lending accounts are something like a crypto savings account, but they have the potential for earning more than if you just stockpiled your crypto assets. DeFi is a catch-all term for peer-to-peer financial services offered on a blockchain. DeFi also provides an investor a way to maximize profit on their crypto assets.

On average, an investor can expect to see returns of anywhere between 3% and 8% on their base cryptocurrency assets (BTC, ETH, etc.) and 10%-15% on their stablecoin holdings (USDT, USDC). The interest rate offered for each of these deposits typically depends on the platform. Different platforms offer their rates based on the needs of their clientele. However, putting crypto into a lending platform will generate significantly more interest than a fiat currency in a savings account. Let's explore the potential for earning on these crypto lending platforms.

How Do Lending and Borrowing Work on a Crypto Lending Platform?

Unlike traditional financial institutions, crypto lending happens through a third party, the platform. In conventional finance, lending and borrowing are managed by centralized banks offering such services. Crypto lending platforms serve the same purpose as banks or other traditional financial institutions (like credit unions etc.) by connecting lenders to borrowers. A lender can lend crypto based on what they have deposited and get interest payments for allowing others to use their assets. A borrower can only borrow crypto if they have an amount of collateral (in crypto holdings) deposited into an account with the lending platform.

The crypto lending process has several steps that each contribute to the overall granting of the loan.

  • A borrower approaches a platform and requests a loan.
  • When the crypto lending platform accepts the loan request, the borrower stakes the collateral for the loan. This crypto collateral cannot be withdrawn from the account once the loan remains outstanding.
  • The platform then locates lenders automatically to fund the loan amount.
  • Investors will collect regular payments based on the interest rates that the crypto lending platforms state.
  • When the borrower completes payment on the crypto loan, they can recover the total amount of their collateral.

Lending and borrowing are two sides of the same coin. Personal loans can be difficult for some individuals to get, depending on their locale and personal credit history. Traditional institutions will go through a regular credit check for each borrower to ensure that they have the means to repay the loan amount. In DeFi, a crypto lending platform won't bother with a credit check but rely on deposited assets to collateralize the crypto loan.

When borrowers deposit digital assets into the lending platform, they are assigned a loan-to-value (LTV) ratio. This ratio is set by the crypto lending platforms and reflects the market's volatility. For example, many platforms limit their borrowers to one-third or one-half of the deposited value in their account. If the value of the deposited digital assets drops below a particular critical value, the platform liquidates the position and repays the lenders. This process removes much of the inherent risk in crypto lending and allows investors to have some peace of mind that no borrowers will abscond with their capital.

Crypto Interest Rates

Interest rates in crypto lending platforms differ depending on the asset in question. Several lending platforms offer crypto loans in multiple currencies, although the most common loan medium is stablecoins. If you have a stablecoin deposit that you can use as lending capital, you can earn passive income based on the offered interest rates. Stablecoins usually have the most attractive interest rates on crypto lending platforms, and they are always in demand by borrowers.

Maximizing your income as a crypto investor means looking at the interest rates that institutions offer for deposits. A traditional bank account typically only provides a portion of one percent as interest, payable once a year. However, traditional financial deposits have deposit insurance coverage, meaning that if the bank were to fold, the money deposited would be reimbursed to the depositor up to a particular value. Decentralized exchanges don't have deposit insurance coverage, making it a slightly riskier endeavor.

However, as with most financial decisions, risk and reward need to be calculated before taking a stance. A person's digital assets can grow significantly over a short period if they invest in crypto-backed lending. Many of these lending platforms offer compound interest, allowing depositors to experience rapid growth of assets. Platforms that typically provide compound interest quote their interest rates as Annual Percentage Yield (APY). Simple interest accounts are also available and grow significantly slower. These simple interest accounts quote their interest rates as Annual Percentage Rate (APR). To maximize return on investment (ROI), a depositor should look for compound interest at attractive interest rates for their assets.

Is Crypto Lending Worth Investing In?

With the rise of cryptocurrency lending, lending accounts are seeing a massive swell in popularity. Lending accounts are similar to savings accounts, except their interest rates are far better than those offered by traditional financial institutions. Crypto lending rates are affordable, and the crypto market continues to benefit from this day after day. The goal of "banking the unbanked" might become a reality with time. However, for these lofty goals to be achieved, crypto investors need to be involved in providing the necessary capital. In the past, buying and holding crypto was the best way to cash in on its value. Today's crypto landscape makes it easier for a non-specialist to obtain financial freedom through wise investment in digital currencies. If you'd like to see your crypto produce more crypto, you have to choose the right platform for your needs.

Earn more with Bitcompare

The best deals, tools, reviews and tips in your inbox once a week.

No spam, unsubscribe anytime. Read our Privacy Policy.