The Wise Investor’s Guide to Bitcoin Lending and Borrowing

As a cryptocurrency holder, you’ll eventually run into the concept of Bitcoin lending– a practice of either directly lending out your BTC or using your BTC as collateral to obtain a loan. 

Bitcoin lending platforms come in all shapes and sizes, with different business models (and disclosures) that can mean all the difference. 

The following Bitcoin lending guide goes into an in-debt (bad pun, sorry) look into the various Bitcoin lending schemes out there, helping you get an excellent view of the BTC lending environment. 

This article solely focuses on the lending and borrowing of Bitcoin, and not other digital assets like Ethereum or Solana. Please note that this is not financial advice– it’s purely educational.

The BTC Holder Side: “I have BTC and want to make money lending it out”

The good news is that cryptocurrency, as a whole, has a vibrant decentralized finance (DeFi) ecosystem making it possible to lend digital assets automatically through smart contracts.

The bad news is that most of this DeFi ecosystem is built on platforms like Ethereum and Solana. 

The main reason is that Bitcoin wasn’t designed to have all the same smart contract functionality as Ethereum, which was specifically designed to create these massive blockchain-based ecosystems.

Workarounds to lend your BTC through DeFi platforms exist, such as “wrapping” BTC into Wrapped BTC (WBTC), turning it into an Ethereum-friendly ERC-20 token, but they’re a bit too complicated for the scope of this article. 

The vast majority of lending Bitcoin activity is, controversially, done on centralized platforms (CeFi). 

These third-party companies take custody of your BTC, coordinate the loans, collect the interest, and pay you out– theoretically, similar to depositing money in a bank, which lends your money out in the form of mortgage and other loans, and pays you an interest.

However (this is where the controversy kicks in), CeFi platforms like Celsius, BlockFi, and Voyager really dropped the ball on this offering– declaring bankruptcy due to “market conditions” and preventing users from withdrawing their funds. More on in the Bitcoin Lending Scams and Frauds section below. 

The Best Bitcoin Lending Platforms

That being said, there are a few Bitcoin lending platforms that emerged from the 2022 chaos with their customer funds and reputations intact, and we’ll cover them below.

Nexo:

Nexo was founded in 2018 and has over 6 million users. Its “Nexo Earn” Bitcoin lending product offers between 3% and 7% APY for international users; the company shuttered its offering for USA users in April 2023.

Nexo’s home page

Nexo’s rates are boosted by a holding of the platform-native NEXO token; staggered loyalty tiers give users various advantages on the platform, such as better Earn rates. However, earning interest payments in NEXO exposes you to the price volatility of the NEXO token, which has traded between $0.06 and $3.87 since its launch in July 2018.

… and that’s about all we’d recommend checking out for BTC lending for the time being. It’s not that other legitimate Bitcoin lending platforms don’t exist; it’s just that after the debacles of Celsius Network, there must be a new industry standard for protecting its lenders to even justify the paltry 5% average you can make lending your BTC out on centralized third parties. 

The Bitcoin Borrower Side #1: “I want to put my BTC up as Collateral for a Loan”

Several Bitcoin lending marketplaces allow you to place your BTC as collateral to obtain a loan (typically in USDC or other digital assets), and are also mostly centralized platforms. 

On one hand, this gives BTC holders liquidity without selling their BTC. Why would anyone consider taking a loan out against their BTC? Let’s say you bought Bitcoin when CoinCentral was founded (about May 2017) for $2,000 per BTC. At today’s prices (assume $34k), you’re sitting on a $32,000 unrealized gain– which can get taxed up to 20% if sold. 

It’s probably cheaper for you to borrow money than it is to pay that tax bill owed if you sell your BTC to get the same funds. 

For example, taking out a $100,000 USD loan from Unchained Capital, a company providing Bitcoin-backed loans: 

you’d put down 7.22 BTC as collateral
Pay $1,150.68 every 30 days in interest payments (assuming only 6 payments)
Pay $1,250 as an origination fee.
Pay $8,154.11 as a finance charge.
If the price of BTC drops below $20,782.51, you’d have to deposit more to lower your LTV (loan-to-value) ratio. 

So, all in all, you’re paying an APR (combined cost of interest charged + other fees) of 16.56% to borrow 100,000, while putting down about $224,000 (assuming $34k BTC) of BTC in collateral, which you receive back once you pay back your loan at the end of the term. 

So, you’ll pay about $16,308.19 to borrow that $100,000. 

If you sold 2.94 BTC for $100,000, you’d incur a $14,100 capital gains tax to pay the government. 

While the BTC loan would cost you more in interest + fees, you’d keep your BTC at the end, whereas selling some of what would be the collateral would liquidate that part of your BTC holding, missing out on any potential upside in Bitcoin price increases. 

Two Bitcoin loan provider to check out include:

Unchained Capital: https://unchained.com/loans
Ledn: https://ledn.io/bitcoin-backed-loans

The Risks of Bitcoin Lending: 

Lending and borrowing digital assets like BTC introduces several new risks you may not be used to with fiat. These risks can vary based on the type of platform, whether it’s centralized or decentralized. 

Counterparty risk refers to the likelihood that a borrower defaults on their loan repayments. Bitcoin lenders try to mitigate this risk by over-collateralizing loans, requiring borrowers to deposit more collateral than typical for a fiat loan. However, if the borrower lends a poorly-collateralized loan out, such as Voyager with 3AC, they could experience a substantial loss if the borrower goes bust. 
Technical risk refers to things like security breaches, hacks, protocol errors, pricing oracle failures, and smart contract failures/hacks. This is more likely to happen with DeFi companies, although CeFi companies have been exposed to their fair share of technical shortcomings. 

Liquidity risk refers to the potential inability of a lending platform to meet its customers’ demands with withdraw their assets. The industry lacks the same proof-of-reserves and auditioning standards as the traditional finance industry, and nor does it have FDIC insurance to cover assets.

Bitcoin Lending Scams and Frauds

The Bitcoin lending sector has seen its fair share of scandals costing BTC holders billions. One of the most widely known of these scandals was BitConnect (2018), a peer-to-peer lending platform. BitConnect quickly rose to a dominant position in the market after a successful ICO hosted in 2016. BitConnect made headlines for its Ponzi scheme strategy and over-the-top marketing campaign. Litecoin Founder, Charlie Lee, expressed concerns over the platform late last year via a viral tweet. Bitconnect shut down its operations within a month of the warning.

I’ve been asked what I think about BitConnect. From the surface, seems like a classic ponzi scheme. I wouldn’t invest in it and wouldn’t recommend anyone else to.

I follow this rule of thumb:

“If it looks like a ????, walks like a ????, and quacks like a ????, then it’s a ponzi.” ????

— Charlie Lee [LTC⚡] (@SatoshiLite) November 30, 2017

More recently, a slew of cryptocurrency interest accounts like Celsius Network went bust in 2022 for a wide variety of reasons, but not exactly scams. These companies were advertising safe and secure lending practices, but were actually engaging in risky DeFi plays, poorly collateralized loans to companies that went bust, and illiquid DeFi positions.  

The companies are currently in bankruptcy proceedings, with billions of dollars of customer funds on the line.

Final Thoughts: The Ins and Outs of Bitcoin Lending

We’ve just gone over a high-level view of the Bitcoin lending industry, and have learned a few important lessons:

DeFi may be promising for BTC lending because it removes the need for a centralized custodial party, but a BTC-native DeFi lending ecosystem has yet to flourish. That being said, DeFi brings its own distinct risks. 
Tread lightly with CeFi companies– as we’ve learned from the likes of Celsius Network, custodial platforms can do more harm than good when it comes to hanging onto your digital assets. 
Taking out a loan with BTC as collateral can be pricy, but it might be a better option for users with large unrealized capital gains, or who don’t have access to established financial institutions, or the non-crypto asset collateral to obtain a loan. 

Whether you’re looking to lend or borrow your Bitcoin, we encourage you to thoughtfully explore the risks involved. 

We look forward to a future where Bitcoin lending is as safe and secure a practice as depositing money into a high-yield savings bank account, but it seems those days are far from where we are today.

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