According to the FDIC, the national average interest rate on savings accounts currently stands at a pitiful 0.04% APY — a pittance compared to the money your bank’s earning by lending out your deposits. As a crypto lender, you get to enjoy interest rates of up to 15% APR. But before you ditch your savings account, you’ll need to learn four fundamental rules to help minimize your risk and maximize your odds of a successful investment.
How does bitcoin lending work?
Crypto lending works similarly to a hard money loan: A borrower must first put up some at-risk collateral — in this case, a portion of their crypto — that you as the lender can seize if the borrower defaults on their payments. Usually, the collateral has to be over 100% of the amount they are borrowing. In turn, you know that if things get hairy, you can quickly recover your money by claiming the collateral.
Why would a borrower want to borrow funds, rather than spend the equivalent amount in what they already own? Well, suppose you hold a bunch of Bitcoin (CRYPTO:BTC), but the Bitcoin market is on the rise. You may not necessarily want to sell it, because you would miss out on potential gains. Instead, you can use your Bitcoin as collateral, borrow a stablecoin such as Tether (CRYPTO:USDT) — with its value pegged to the U.S. dollar — and still get liquidity. Once you pay off your loan, you get your Bitcoins back — and if their value’s risen in the interim, all the better.
Crypto lending is just one of the several paradigm shifts of decentralized finance (DeFi). Lenders can benefit from their crypto wealth without selling off large portions of their crypto holdings — which could trigger capital gains tax and cost them long-term gains should the crypto market enter another bull run.
With that in mind, pay close attention to the following five rules for a successful crypto lending venture, so that both you and your assets are ahead of the game.
1. Monitor ever-changing local crypto regulations
Recently, especially in the United States, crypto regulation has sparked many heated debates among politicians. One popular lending platform in particular, BlockFi, was recently served cease and desist letters from multiple states’ attorneys general — just in time for its proposed IPO.
State regulators have since been cracking down on all of the DeFi lending platforms, concerned that DeFi lending constitutes an “offering of unlicensed securities.” Adding fuel to the fire, earlier this month another platform, Poly Network, disclosed a security breach that cost users $600 million.
Coinbase (NASDAQ:COIN), one of the largest decentralized exchange platforms in the world, just announced that it has plans to approach the Securities and Exchange Commission with its own regulatory framework pitch. It should be noted that this happened merely weeks after Coinbase was forced to shut down its own crypto…