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Tutorial: Bitcoin Investment in Margin Lending

November 5, 2020 by

Many think of Bitcoin as an investment and rightly so, it has grown from being worth fractions of a penny to being worth thousands of dollars in mere years. Price fluctuations have made it a popular commodity to trade both in the futures market and in real time. Bitcoin now easily surpasses $100 million in daily trading volume on a regular basis. This type of volume has driven a large need for liquidity in the market — essentially, bitcoin loaned to a margin account so that active traders can increase the size of their positions. If you do not want to engage in speculative trading using bitcoin. Many popular exchanges now let their users offer short-term bitcoin loans to margin traders who then repay the loan with interest after the time limit has expired.

In this tutorial, you will learn how to loan bitcoin out to margin traders on some of the more popular exchanges. You will see the actual step-by-step process of putting your bitcoin to work as well as covering the expected returns and any risks that you might face in doing so. All users are encouraged to use the two-factor authorization, which will greatly increase your exchange account security.

Bitfinex

Bitfinex is one of the most established exchanges running today. It is composed of two legal entities — BFXNA Inc. and BFXWW Inc. Both are operated by a single parent company (iFinex Inc.), are registered in British Virgin Islands, and do business out of Hong Kong. It has a stellar reputation and lots of volume. Volume is key to putting your bitcoin to work for you. The more trading people want to do the more likely they are to borrow your funds to do so. Bitfinex has the volume to keep your bitcoin actively loaned and earning interest.

Getting Started

Setting up an account with Bitfinex is simple. You will be asked for a username, email address, and password of your choice. Enter this information, verify your account by following the link in the email Bitfinex sends, and then your account will become activated.

Once you have logged into your account, the homepage can be used to deposit bitcoin. The link is at the top-right corner of the home page:

Bitfinex - Deposit

Bitfinex accepts deposits in bitcoin (and other cryptocurrencies) and in USD by bank wire transfer. Bitcoin and crypto are preferable because they avoid the hassle and fees associated with a bank wire. Bitfinex requires a minimum of $50 to offer margin lending (called Funding in this exchange), so make sure you deposit at least that amount in bitcoin.

Bitfinex - Deposit Methods

The money you wish to use in margin funding should be moved to the special Funding wallet within your account. There are three wallets in total for your account at Bitfinex: Exchange, Margin, and Funding. The last one is the one you need to use to earn by making loans.

Lending Options

Bitfinex offers two interfaces for setting up your lending operations. The first one is the normal Funding page — it is easy to understand and is quite powerful on its own, especially if you aren’t going to actively manage more than 10 loans simultaneously. The second interface is Lending Pro, which is aimed at big lenders. It allows optimization and automation of the lending process to maximize your potential profit. Both interfaces are interconnected — you will be seeing offers created via Lending Pro on the normal Funding page and you will be able to read detailed reports about funding provided via the normal interface on Lending Pro.

Basic Funding

On the Bitfinex homepage, choose the Funding tab to the right of the logo. This will display get you to the margin funding page. Where the left-hand menu hosts the funding form:

Bitfinex - Offer Margin Funding

Select the currency you are lending — in this case, BTC. Then fill out the daily interest rate, loan amount, and loan period (2–30 days). Then you need to click the Offer button (e.g., BTC Offer if you are lending BTC).

You can take advantage of the Bitfinex Flash Return Rate (FRR) to help automate your loans. Auto-renew works just like on Poloniex, offering your loan back to the borrower as soon as it expires. The FRR, however, is a unique feature Bitfinex offers to set the interest rate. To select this simply check the box labeled FRR near the interest rate value.

If you turn FRR on, Bitfinex will automatically assign your loan an interest rate based on the average of the total fixed rate positions, weighted by the size of the loan and terms. FRR is not the optimal way to make money, as it will sometimes lead to your loan being offered at a rate that is not competitive enough. Letting your loan sit idle and not earning interest will cost you a lot of returns in the long run. There are three types of FRR on Bitfinex:

  • Normal FRR — works just as explained above.
  • FRR delta variable — you specify a delta that will be added/subtracted from the FRR. The FRR is continuously recalculated. Once the offer with that rate is matched, it becomes a normal fixed rate offer.
  • FRR delta fixed — like the FRR with a variable delta, but FRR is calculated only once.

You can also make the offer Hidden. Hidden offers aren’t seen among the funding order book, but will get executed once someone bids for the rate given in such an offer.

Rates on Bitfinex can move rapidly between 0.01% and 0.2% daily interest. It is in your best interest to keep a close eye on your loans to make sure they are competitive at all times.

Once you have set up the loan to your liking, hit the red Offer button. Your loan will then enter the lending pool and will be automatically assigned to a borrower who agrees to the terms. You can follow your loans on the Funding page.

Your lending offers that have already been taken by traders get listed with along their expiration period:

Bitfinex - Lending Provided

Your active lending offers are listed below those and are open to modification and cancelation:

Bitfinex - Lending Offers

Lending Pro

Lending Pro streamlines the process for providing cryptocurrency margin funding loans with maximum automation and at optimal rates. To start with Lending Pro, click the link in the Funding menu at the top-left corner of Bitfinex platform:

Bitfinex - Go to Lending Pro

This will get you to a dedicated lending interface with lots of reports. Even if you never used the Lending Pro interface but have made loans using normal Funding interface, the reports will already contain data.

You can turn on automated lending for any cryptocurrency via the Automation Settings button in the top-right corner of the screen:

Bitfinex - Automation Settings

For each cryptocurrency you are interested in lending in, you can configure lots of options:

Bitfinex - Lending Pro Settings

The main setting is to Enable automation. Then comes the Lending mode: Dynamic (offers get auto-adjusted gradually until they are taken), Fixed, and Market (using last known matched rate).

There, you can also set the Minimum rate, Reserved funds (funds will not be used for lending), Rate retention (to allow longer periods for higher interest rates), Fixed rate for fixed rate mode, Fixed amount (to make all offers fixed in size), Fixed period (to set a fixed period for all offers), Maximum offer amount (percentage of your funds to use by automated lending), Hide open offers, Undercut open offers (all offers created by the automation strategy will have their interest rate reduced by percentage given here).

When you are done setting up the automation rules for all your cryptocurrencies, you can return to the main page of the Lending Pro interface to observe the automatically created offers and see reports of your automated lending activity. In addition to usual tabs you can see in the normal Funding interface, the following facilities are available here:

  • Today earnings — a quick overview of what each crypto has earned you via lending today.
  • Lending performance — see the average rate, period, and level of utilization as well as the status of automation for each of your non-zero crypto wallet.
  • Distribution chart — it shows how your cryptocurrencies are distributed by amount, period, or rate.
  • Lending rates — it shows best, average, and lowest rate.
  • Provided loans — total number and value.
  • Most active — the most active cryptocurrency with amount of funding filled.
  • Assets managed today — how much total value was managed by Lending Pro today.
  • Loans expiring — a distribution chart your cryptocurrencies by their expiration.
  • Provided stats — detailed stats for loans you are providing with estimated returns.
  • Recently filled — the list of recently filled funding orders.

If those aren’t enough, you can also switch from the Lending page of the Lending Pro interface to the Earnings page via the top-left corner links:

Bitfinex - Lending Pro Earnings

The Earnings page consists of highly customizable reports and charts that let you understand easily how your lending performs with different cryptocurrencies over time. You will find here the main earnings chart, average daily earnings number, top earning crypto (plus runners-up), today’s earnings, this month’s earnings, and this year’s earnings.

Risks

Margin traders are eligible to borrow an amount of 5 times their margin balance (1:5 leverage). This is important if the market makes a fast significant move against the position traders have taken. It is possible that the margin call will not be fast enough and you will lose both your interest and some of your principal. This does not happen often as Bitfinex will automatically attempt to liquidate a margin trade if it falls to the value of the borrows collateral balance, but with the 3⅓ leverage it can definitely happen. With higher interest rates comes higher risk.

Being hacked or internal issues are also a risk, as with any exchange. Only invest what you can afford to lose.

On August 2, 2016, Bitfinex has been hacked with a resulting loss of $72 million worth of BTC. The company imposed a 36.067% haircut on all participants. Even though, the lacking funds have been replaced by the special IOU tokens (BFX), the hack incident has proven that margin lending poses its own significant risks. Since then, the company has returned the value of the lost funds to their members using various loss-mitigation strategies.

Poloniex

Poloniex is a formerly USA-based and now Seychelles-based cryptocurrency trading exchange that is home to a large amount of volume.

Getting Started

To begin earning interest on Poloniex, click the Sign Up button on the homepage to create your account. Poloniex asks for your first and last name, your country of residence, an optional phone number, email, and password of your choice. The verification process is then completed by checking your email and following the verification link sent to you by Poloniex.

From the homepage, choose the Lending tab at the top of the page, to the right of the Poloniex logo. From there you can deposit bitcoin and get started loaning. The minimum loan amount is 0.005 BTC at Poloniex. Look at the top right of the Offer BTC box near the top of the page. In the upper right corner, there is a link to deposit bitcoin:

Poloniex - Offer BTC

Loans have an auto-renew feature that can be activated or not. This feature will re-offer your loan to a borrower once the previous loan’s time has expired, or if the borrower chooses to pay his loan off early. The borrower is offered the choice to retake the loan at the same rate, but this is a feature that must be closely monitored.

If loan interest rates jump up during the course of the previous loan, you do not want to offer the same lower interest rate as you did previously. Instead, you will want to manually re-offer the loan at the new higher interest rate being offered.

If interest rates drop, then the borrower will likely decline to renew the loan to take advantage of the new lower rates, leaving your bitcoin unused and not earning for you. You will want to manually re-offer the loan at a lower, more competitive rate.

The auto-renew feature is good to use only if rates have not changed significantly during the course of your previous loan. Remember that rates can and do change significantly on Poloniex, so even if you choose to use the auto-renew feature, it is imperative that you check the current interest rate often. You will earn more by keeping your loan rates competitive and your bitcoin loaned out on a constant basis.

Loan Duration and Rate

The typical loan on Poloniex is short-term, two days being the shortest time allowed and the most popular. The interest rate you set is daily, so every 24 hours, you will collect the interest rate you set. Users can extend offered loans all the way up to 60 days, but this is not recommended. The reason for keeping your loans short is to keep your offer adapting to the changing interest rates. These can quickly shift due to the chaotic nature of bitcoin’s price. Quick fluctuations will drive the interest rates up as more traders look to cash in on big price moves and borrow in order to get maximum positions. Times of consolidation or price stability will usually move the interest rate lower as volume traders exit until the next big price move.

Typically, the daily interest rate your bitcoin can earn on Poloniex moves from 0.01% to 0.2%. This rate can move to either extreme within a day or two if there is a large spike in buying or selling. Remember that price drop is also a time when margin accounts will be active due to traders attempting to buy the dip or average down on their positions.

Poloniex takes a fee of 15% of your earned interest from each loan completed. This is done automatically at the completion of each loan before your loan and interest are returned to you.

On the Lending page, all the current loan offers are displayed by their interest rate, amount, and duration. This is pictured below. You can use these rates as a benchmark for setting your own. Your aim should be to keep your loans offered at a very competitive interest rate.

Poloniex - Current Loan Offers

When you have made all the decisions about your loan amount, rate, and auto-renew status, simply hit the offer loan button. Loans will automatically be matched up with interested borrowers. You can track your loans at the bottom of the lending page:

Poloniex - My Open Loan Offers
Poloniex - My Active Loans

Risks

Poloniex relies on margin calls to keep risks at a bare minimum. Leveraged traders are the people you are lending to. They are asking to borrow money so they can increase the size of their positions. On Poloniex, margin traders can borrow up to 2.5 times the amount they have in their margin account (i.e., 1:2.5 leverage). A margin call is done if the margin position loses more than the amount the borrower is using as collateral. If a margin call occurs, Poloniex closes the position and returns your loaned-out funds. A margin call is triggered automatically to ensure that no position goes beyond what the borrower has as collateral. This is a good safeguard, but if your borrower suffers a big loss very quickly, it is possible that the margin call will not occur quickly enough to recuperate the entirety of your loan. In the event of this happening, you will lose the interest accrued on the loan and whatever amount of principal that could not be recovered by the margin call. While not likely, this can occur due to the volatile nature of bitcoin’s price.

Even though the probability of a margin call failure that could cause the loss of margin lender’s funds is low, this has already happened once on Poloniex. On May 27, 2019, Poloniex margin lenders incurred a loss of 16% of total BTC lent as the exchange’s margin call system failed to react to an abrupt price crash in the CLAM vs. BTC crypto pair. This shows that margin lending should not be considered a risk-free investment.

Huobi

Huobi is a Singapore-based centralized cryptocurrency exchange, which is especially popular in the East Asia region.

Getting Started

The Sign Up page for Huobi is pictured below. To open an account with this exchange, you have to provide your country, email address (or phone number), a password, and agree to their terms of service. After confirming your email address (or your mobile phone number), your account is live.

Huobi - Sign Up Form

You can deposit funds using Exchange Account (Deposit and withdrawal) link in the Balances menu in the top-right corner of the trading platform:

Huobi - Deposit

Lending Options

To start lending, pick the C2C Lending option in the Wealth Management menu in the top-left corner of the screen:

Huobi - C2C Lending

This will get you to the actual lending interface:

Huobi - C2C Loan

As you can see, Huobi allows lending operations only in USD and BTC. The exchange also sets the minimum (0.01%) and the maximum (0.098%) interest rates. The loan duration is also less flexible than at Bitfinex or Poloniex — you get 30, 20, or 10 days. The minimum size of loan for bitcoin is 0.001 BTC. You can also turn on Automatic maker switch, which will automatically resubmit your offer after it has been repaid.

The loans you make to Huobi margin traders are used for trading with a leverage of up to 1:3. Margin trading is only allowed in BTC/USD currency pair at Huobi. This significantly limits the risk of a market crash leading to negative balances in traders’ accounts and thus the loss of margin lenders.

The platform’s service fee on margin lending profit is 18%, which is quite high compared to competitors.

Risks

Normal margin lending risk of failed margin calls is partially mitigated by the restriction of leverage to BTC/USD crypto instrument only. This makes margin lending at Huobi somewhat less risky than at exchanges that allow leveraged trading in exotic coins and tokens.

Like every exchange, Huobi is at risk for hacking or internal problems that could result in the loss of all of your funds. Only invest what you can afford to lose.

Automating the Process with Bots

Margin lending bots exist to make the process of earning interest as hands-free as possible. They are designed to keep your money being lent out at the best possible rate at all times. It can be a lot of work to keep your loans at an optimal interest rate because of how quickly it changes on all the exchanges. So, it is definitely worth taking a look at bots. Often, the cost of using one will more than be made up by their effectiveness at keeping your bitcoin constantly out on loan. Here are two examples bots and a description of how they work.

Poloniex Lending Bot

Mika Lending Bot was developed to automate Poloniex lending using Python language. The margin lending returns seem to be much better than other forms of P2P lending, but it is a lot of work to lend manually because of the sheer volume of loans produced by this style of lending. The automation is designed to remove all the hassle from the lending process and turn it into a set-and-forget passive investment kind of strategy.

Mika Lending Bot is an open-source and completely free piece of software. You can download the bot and install it on your PC, on some dedicated Linux server, or on a Windows VPS server (commonly used for expert advisors hosting). You would still have to trust it with your API keys of course.

How It Works

The purpose of employing an automated lending bot is to make the process hands-free for you. Instead of having to manually check and alter your loans, the bot will automatically evaluate the market and determine the most competitive daily interest rate.

Poloniex spreads out your loans to dozens or even hundreds of different borrowers. This can be somewhat handled by their auto-renew feature, but you risk your loan sitting idle or being loaned out for too small of an interest rate if you only employ auto-renew to manage your loan. With the bot managing your account, it will handle submission of the loans and will attempt to get you the best interest rate possible at the time the loan is given.

The service automatically differentiates between loans initiated with the bot and those done manually, so you can continue to do manual loans at the same time you are employing the bot if you choose.

Keeping your bitcoin loaned out as often as possible is crucial to maximizing your returns, so even if you have to rent a VPS to host the bot, it will often pay for itself with its ability to get loans out on a constant basis.

Further Development

Currently, the bot can also work with Bitfinex exchange, however, I find the specialized BitfinexLendingBot by Andrius Sutas (described below) to be much more effective with that platform.

Risks

In order for the bot to place your loans, it has to have access to your account. This is a real security concern. In order to alleviate these concerns the Poloniex Lending Bot features a security item that limits the abilities it has with your account. The bot is only given restricted API access to your account, disabling both trading and deposit/withdraw options. The restricted access means that the bot’s creators could only potentially gain access to your lending activities and wouldn’t be able to steal your funds.

The fact that this is a popular open-source software that is being used by the cryptocurrency community for some time now speaks for its security. Most importantly, the bot is technically incapable to take any money from your account.

Using a bot does not alleviate any of the concerns you would have doing business on an exchange in general. There is still a chance of a late margin call due to a sudden crash in bitcoin price, or Poloniex becoming insolvent.

Bitfinex Lending Bot

Even though Bitfinex has gone through a rather rough period due to its hacking episode, the platform is currently actively used by traders. It is also suitable for margin lending investment. A number of lending bots are available for Bitfinex. The most well-coded and easy-to-use option is BitfinexLendingBot developed by Andrius Sutas in Go language.

Basic Information

BitfinexLendingBot (or BLB for short) is distributed in form of source code written in Go. This means that you can run BLB on any platform (Linux, Windows, Mac), but you need to compile the source code on that platform. The process is straightforward and is thoroughly explained in the project’s description. The main steps are downloading and installing the Go compiler, downloading the source code files, compiling the code, setting up the API access on your Bitfinex account, configuring and running the BitfinexLendingBot application.

The bot can lend in USD, BTC, ETH, and other cryptocurrencies traded on Bitfinex. It is completely free, but you are encouraged to donate to its author to support further development.

How to Use It

One of the most important steps to use BitfinexLendingBot successfully is setting up API access for it to participate in margin funding with your account. This allows the bot to offer your cryptocurrencies and USD for funding without it being able to trade, exchange, or withdraw funds. After you log into your Bitfinex account, you can create an API key via Account->API link. When you create a new API key, the only permissions you should set are Margin Funding Read & Write and Wallets Read. Make sure to write down the API Key and API Secret values to configure the BLB.

In addition to setting the API key, you can configure the bot’s lending parameters. It is done via the same default.conf and is described in details on the bot’s GitHub page. The bot can use two strategies:

  • MarginBot — a complex lending strategy with multiple parameters making it very flexible. The defaults work great, but you can play around with the parameters to get higher rate for long-term lending for example. You can also spread your funds across the range of rates. This will help if you have a big enough account to influence the market seriously when lent as a lump sum.
  • CascadeBot — a simple lending strategy that starts at some initial rate and reduces it gradually until the offer is taken.

Running the bot with --updatelends --dryrun keys will test it without actually sending any lending offers to the market.

You can set up either a crontab (on Linux) or Task Scheduler (on Windows) to run the bot every 30 minutes or so.

Using the key --logtofile when running the bot will switch it to write its output into a log file rather than to the screen. This is particularly useful when using BLB in a fully automated mode (and why else do you need a bot?).

Expected Returns from Margin Lending

Interest rates on your margin loans are calculated daily. This is why having your bitcoin loaned out as often as possible is crucial to maximizing your return.

On most exchanges, bitcoin lending rates move in between 0.01% and 0.2% daily interest. Compounded over the course of a year, this can add up to a healthy 10%-15% on your investment. Remember that you will be paying 15% of your earned interest to the exchange when you are trying to calculate your investments.

Right now, the risk is minimal in the markets, but bitcoin is a volatile asset and there is a risk that you could lose your entire investment if the price of bitcoin falls dramatically. As stated before, do not invest more than you can handle losing.

Shop Around for Better Yields

One important step that is often overlooked by the newbie margin funding providers is comparing yield rates between exchanges. While the difference between BTC interest rates may be quite small, the lower volume on altcoins causes the yields to diverge between exchanges. For example, as of November 5, 2020, the gain on BTC at Bitfinex was 0.01% per day — significantly higher than the gain at Poloniex (0.007%).

However, when choosing a better interest rate for your investment, you have to consider the following factors:

  • Deposit/withdrawal time — if withdrawing the cryptocurrency from one exchange and then depositing it to another one will take a few days (for example, due to long confirmation or processing time), it is probably better to remain with your current facility. Do not forget that most exchanges offer possibility of withdrawing coins directly to the deposit address at another exchange.
  • Transfer fees — if the cost of a withdrawal transaction exceeds the size of potential earning on the interest rate difference, postpone the transfer for better times.
  • Exchange security — sometimes, bitcoin exchanges get hacked or experience some other troubles (like withdrawal problems). It is useful to take into account these issues when you decide to hunt for higher rates. Finding a higher interest rate on some shady exchange is not worth losing all your crypto-funds.
  • Rate stability — as you have probably noticed, interest rates on all cryptocurrencies fluctuate significantly. Make sure that the rate is higher long-term on a new exchange. It would be a disappointment to waste time and money on transfers to find out that it was just a temporary spike in the interest rate.

Update 2020-11-05: This tutorial has been updated to provide the most up-to-date information on bitcoin margin lending.

If you have any questions about investing your bitcoin in the safest way possible or if you want to share your own BTC investment strategy (in margin lending or otherwise), please let us know using the commentary form below.

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