The Risks of Lending Out Your Bitcoin

The Risks of Lending Out Your Bitcoin

By johnwege | johnwege | 15 Apr 2021

This year has been incredibly exciting. With the price of bitcoin establishing a new all-time high in the mid $60,000s range.  And it is still only April.  During previous bull runs; bitcoin's largest parabolic movements have typically happened towards the end of the year.  This has had many bitcoin experts predicting that bitcoin will go even higher than $300,000.  In fact, just yesterday the CEO of Goldman Sachs said that he believes bitcoin will reach the level of gold, and then surpass it.  Which means that he believes it will go higher than $500,000.  No matter what happens; it is definitely an exciting time to be in the market.  

As prices have risen significantly, a lot of HODLers have been trying to find other ways to accumulate as much bitcoin as they possibly can.  Myself included.  Most of these people end up deciding to lend out their bitcoin to services such as BlockFi, Nexo, Celsius and the list goes on.  Using these services are extremely easy, and can return a great profit, but there is a level of risk that many people aren't taking into consideration when using these services.  After understanding the risks that come with lending it will be much easier to decide if lending is the best option for you.

The Positives


Of course the biggest positive that comes from lending your bitcoin is receiving that passive income.  The most common rate for lending bitcoin that you will come across is usually around 6%.  This interest compounds and can quickly add up and make a real difference in your portfolio.  The great thing is that unless you choose otherwise, most of these services pay in you in-kind coins.  Meaning that if you lend out bitcoin, they will pay your interest in bitcoin.  And an important thing to remember is that the interest you receive is based on the amount of BTC that you are lending.  Not the dollar value that you are lending.  (unless you're lending a Stablecoin)

This is exactly how you would want it to be. Naturally during bear markets this will mean that your interest earnings in terms of dollars will drop significantly.  But when the bull markets finally do come around; all of your past earnings will significantly increase in value.  And you will be receiving a higher amount in terms of dollars as the price continues to go up.

Another positive is just how easy and convenient lending your bitcoin can be.  Often all that you need to do is to deposit your coins on to the service and the rest is taken care of for you.  It is that extremely passive income that many of us dream about.  Depending on the service you may be paid daily, weekly, or monthly.  Personally I like the longer payment schedules. The reason for that is when I am finally paid, it is a much significant amount and it helps to motivate me to grow my portfolio even more.  But everyone has their own preference.

The Risks


When you deposit your funds onto these services, you are giving up custody to them.  Your fate is up to them.  And many times, they aren't fully explaining just how they are actually making revenue to pay lenders their interest.  They lend, trade, but they also participate in dangerous price arbitrage as well.  Companies that participated in Grayscale's GBTC price arbitrage had a difficult time of things when the price went severely negative during the last few months.  Which actually led to speculation that one of these services might be having problems remaining financially solvent.

That leads to my next point.  If the lending service becomes insolvent and goes out of business, there is no guarantee that you will ever get your bitcoin back.  In fact, it is probably most likely that you won't.  Services such as BlockFi and Celsius offer no lending insurance whatsoever.  While companies like Nexo do have insurance, but it only covers funds stored in BitGo, and only goes up to $350 million.  Which isn't enough to cover the funds on their platform.  This insurance covers things such as a hack, but doesn't cover anything in a hot wallet.  At the time of writing, they have several hundreds of millions of dollars stored in hot wallets that could be at risk.  So it can be deceptive for them to say that you're funds are protected on Nexo.    Perhaps a horrible situation on these services will never come to fruition, but it always important to understand the possible risks when lending out a significant amount of money.

Finally, it can be quite an experience to actually get your money back out of these services.  On some of them it can become a multi-day or even week process to receive your funds.  There is also a high chance that you will have to perform another identification as well.  There have been countless stories of people putting in withdrawal requests for their funds, only for them to be rejected.  Always be careful out there.

It can be very temping to go after that 6%+ annual interest on your bitcoin, that is currently just sitting in cold storage.  But always remember that bitcoin is one of the, if not the scarcest money humans have ever had.  Owning just a small portion of a bitcoin could be life-changing for people.  While owning multiple bitcoins could equal to being enough money for your family for generations. While that previous sentence might have you wanting to accumulate more by all means necessary.  It's real meaning is that you need to be proactive in the safety of your coins, and understand the importance of the asset you have.  That 6% yearly rate sounds good, but it is quite small compared to the average yearly 200% increase that bitcoin has made historically.  

With that being said; this isn't meant to be a bearish article on bitcoin lending, as I am a personal big fan of it and have no plans to stop.  But it does mean that you need to fully research what you're doing with the funds that you worked so hard to accumulate.  Personally, I will continue lending to a few different services; after all that passive income is hard to pass up, and the rate might not always be this high.  With that said, I am not putting all of my bitcoin these services.  Only lend out what you can afford to lose.

How about you? Do you think the risks are worth taking to receive that passive income from lending out your bitcoin? Which services do you like to use and why?



As always, thank you for reading! 

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Living day by day, stacking sats and trying to retire early. Check out my substack blog Follow me on Twitter

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