One of my favorite ways to earn a passive income is by lending out my bitcoin. I do this by lending out to several services such as BlockFi, Celsius, Voyager, Nexo and the list goes on. These services have surged in popularity during the last year; especially as the prices of BTC and other cryptocurrency coins have skyrocketed in price. But are these services too good to be true? Is the risk worth the reward? After all, bitcoin is a once in a lifetime type of asset that has insane year-over-year gains.
Let's dig into this further.
Like I just mentioned before, lending out Bitcoin, and even ethereum has become one of my greatest ways to make a passive income. While I am a very small minnow in an ocean of sharks and whales, it still has helped me to grow my monthly cryptocurrency passive income to about $1,000. This has increased greatly over the last half year as the prices of coins has risen as well. Because of the fact that for most of these services you are paid interest in the same coin that you are lending. Since that interest is denominated in the cryptocurrency that you are lending, if the price of that coin goes up, so does your monthly interest value in terms of dollars.
Why Would You Want To Lend Out Your Bitcoin?
Well before I tell you why you would be interested in doing this; I do want to be sure to say that there is risk involved with this. I will get to the risk part a little further down in this article.
Of course the reason most people would want to do this is to increase their portfolio size even more and earn a passive income. Who wouldn't want to earn extra money for something that you already own? I have been using BlockFi for over two years now and I will admit that the first year I was using it very conservatively. Meaning that I would only deposit quite small amounts of BTC in regards to my portfolio size. At the time BlockFi, and other crypto lending services were still very new, and in my mind unproven. I wasn't ready to add more risk quite yet. I decided to take a wait and see approach. I wanted to see how these businesses would handle difficult market situations and if they would remain solvent. And they have.
The biggest proving factor to me was last year during the big March price crash. With the price of the entire market dropping upwards of 50% in hours. During this time, most of these businesses were operating as normal, and withdrawals were still open. This grew my faith in businesses like BlockFi quite a bit.
And then we have the whole market situation ever since last summer when the prices began to go up. While this price increase was beginning to happen I soon realized that it was quickly becoming much more difficult to accumulate significant amounts of bitcoin. For example; In early September of last year you could still buy 0.01 BTC for about $100. But today if you wanted to buy 0.01 BTC it would cost you upwards of $560. The same goes for ethereum and many other coins. It has become much more expensive to grow a big cryptocurrency portfolio.
And that is why I began to take on more risk and lend out much more of my BTC and ethereum. I had initially been wanting to earn at least 0.01 BTC in interest every month, and thankfully I have been able to achieve that. Now I have set my next goal on earning a month BTC interest reward of 0.02 BTC. I am wanting to always have a steady and constant amount of cryptocurrency that I am able to accumulate on a monthly basis outside of normal cash spot purchases. Of course I am still buying bitcoin constantly trying to get as much as I can, and am always ready for the next dip buying opportunity.
There are two types of people that will often loan out their bitcoin. They are either the type of person that is similar to me who is trying to accumulate as much as possible or they are the type that is happy earning a little extra cash for something you already have. It is a little bit similar to selling things around your house when you are needing cash, but in this case you still retain "ownership" and are paid on a recurring basis.
I did put quotes around the word "ownership," because while you do technically still own it. But most of these services require that your lending funds be held on their service. Meaning you are giving up your control of the asset, something that is one of the core principles behind bitcoin. The ability to be your own bank, have complete ownership of your money, and what you want with it whenever you like.
Too Good to be True?
And then you need to consider how these services are making the profits to be able to pay the high interest rate that they are giving you to. These service are lending out your coins to other people who need the funds for a variety of reasons. Also some of these companies are known to participate in arbitrage opportunities. A large amount of the loans that companies like BlockFi give out are over collateralized loans; which means that you can't get a loan without already having money. Generally you can get a loan for about 60-70% of the total amount that you already have. So if you were to have $10,000 of collateral, you would then be able to take out a loan for around 70%.
But sometimes these companies will lend out non-collateralized loans. This means the company doesn't have to provide any capital to receive the loan. This type of loan is usually done to larger companies that have a great image and therefore is confidence the loan will be paid back, or to several time repeat customers. But when there is non-collateralized loans; that adds risk to the whole venture. Especially if the market becomes quite volatile, and that is a common occurrence in the cryptocurrency market. If the market would take a turn for the worse and the borrowers would be unable to provide more collateral or payback their loans; it could put the lending company in a very difficult situation to avoid insolvency. You need to understand that a large amount of the lending companies do not provide insurance on your money like you would find at a bank. If the fund are lost, there is a chance you will lose out on all of your money. Which is quite frightening considering how common hacks are in the technology world lately.
The rates that they do pay out are great; far better than any bank you will find and it isn't even close. Often around 6% for bitcoin, in the 5% range for ethereum and upwards of 8.6% for stable coins. Whereas you would be incredibly lucky to find a bank that paid an interest rate of over 1%. It almost makes you begin to think why you aren't putting all of your cash on here to earn interest instead of keeping it in a bank. While most of these services have a very clean track record, there is always the risk that something could go wrong. Like I mentioned before; services like BlockFi or Celsius do not provide insurance on your funds, and so I wouldn't put all of my cash on there.
I also like to diversify where I put my lending portfolio as well. As I began lending out more and more I decided that I needed to begin to spread my coins among different services. I know keep nice portion of BTC on BlockFi, but have begun adding to Celsius, I also use Celsius for my Ethereum and look elsewhere for my Stablecoins. While the rates are all quite similar; so you can't go wrong with what service you use, but if one service were to have a major meltdown I prefer to minimize my risk slightly by not having all my eggs in one nest.
My Conclusion
While there is indeed great risk, and there is a chance I could lose a giant amount of money using these services. I have done the research, and am satisfied with what I have seen. This has me willing to take on risk to accumulate more cryptocurrency, which could hopefully change my life in a few years time. After all; "no risk, no reward." But I would recommend each and every one of you to do your own research as well and always be careful. As the price of bitcoin and ethereum are rising, we all must adjust our thinking and how we go about accumulating if we want to be winners in this game. It is becoming much more difficult for the average person to accumulate a significant amount these days, but for the people who think hard, and find ways to do it; they will be immensely rewarded.
But what about you?! Do you lend out your bitcoin, ethereum or other cryptocurrency? Which services do you use, and what are you accumulation goals!?
As always, thank you for reading!
