How to monetize your Bitcoin holdings without selling
You are team HODL. You are holding your favorite cryptocurrency for the long term. You see Bitcoin or Ethereum experiencing highs and lows, but you are holding the coins for the big payoff, when BTC trades at $25,000 or ETH hits $1000 or higher. In order to make money, you just have to wait, right? The only way to extract income is to sell your holdings. Right? No, wrong.
You can now make money from your Bitcoin (or any other cryptocurrency) holdings by lending it out. Lending crypto? Yes, you can let someone borrow your Bitcoin and pay interest.
Why would someone borrow Bitcoin?
The main reason to borrow Bitcoin would be to implement a short position. A short position enables you to sell Bitcoin and then buy it back. A trader who enters into this position bets that Bitcoin will drop in price. Here is how it works:
Short Seller Enters into position by selling Bitcoin @ $19,000
Short Seller Closes the position by buying Bitcoin @ $17,000
Seller Profit: $2000 - Interest Costs.
This scenario assumes that Bitcoin drops. Let’s see if Bitcoin ends up at $21,000
Short Seller Enters into position by selling Bitcoin @ $19,000
Short Seller Closes the position by buying Bitcoin @ $21,000
Seller Loss: $2000 + Interest Costs.
As you can see, this can be a risky trade for your counterpart. The maximum profit would be $19,000 (if Bitcoin goes to zero), while the maximum loss is infinite (Bitcoin doesn’t stop climbing).
As a HODLR, you remain in your position for a long term, therefore you don’t mind a small drop in BTC. So, in both the above mentioned scenarios, you make money by being the person who collects interest.
How is the interest calculated?
You lend one BTC to a short seller at 10% annual rate.
Short Seller holds short position for 3 months.
1 BTC X 10% X 3 Months/12 Months = 0.025 BTC in Interest Collected
Lending your crypto position can be counter intuitive, as you are giving the bears ammo to hurt the price of your holding, but given long term confidence in your crypto holding, this should not be an issue. In fact you can benefit, by having your crypto position drop in price, then purchasing more at a lower price, and gaining interest on your original position.
Interested? There are quite a few exchanges that enable you to lend your crypto position:
Poloniex
Poloniex is a US based crypto to crypto exchange that launched in 2014. Poloniex consistently has some of the highest volume of all the crypto exchanges. Lending rates on Poloniex are calculated daily. A great deal of lending on Poloniex happens via bots powered through the Poloniex API.
Coincheck
Coincheck is a Japan based exchange that allows for crypto lending. This exchange was founded in 2012 with 71 employees. You can lend not only Bitcoin but also: Ethereum, Ripple, Monero, Factom, and Augur. The maximum interest rate on this platform is 5%.
Bitfinex
Bitfinex is a crypto exchange founded in 2012 and owned and operated by iFinex, Inc. Bitfinex allows users to lend in both fiat and cryptocurrency. Bitfinex’s Margin Funding (P2P) market gives users (lenders) a way to earn interest on their digital assets by allowing them to lend their funds to other users (borrowers) who want to trade with margin. Lenders can offer financing at the rate and duration of their choice, or they can lend at an automatically adjusting rate that Bitfinex refers to as the Flash Return Rate (FRR).
Always remember that lending is not without risks. Lending forces you to lose control of your crypto position for the length of the loan or until the borrower ends the trade. If the borrower is right and the coin you lend drops by a high amount, there is no way for you to sell your position until the borrower exits. Additionally, you will be forced to leave your holdings on an exchange for the term of the loan (if the borrower does not close the position prior to the completion of loan term length). Leaving your position on the exchange can be risky as exchanges can be hacked. Bitfinex (mentioned above) had one of the highest profile hacks in 2016 as $72mm in Bitcoin was stolen from customer accounts.