Whilst that is the case, there are several platforms to choose from if you’re planning on lending out your digital assets, or wanting to withdraw fiat currency using your cryptocurrency as security.
Interest paying accounts
Celsius Network currently offers 25 cryptocurrencies on which you can earn up to 10% interest per annum whilst coins are deposited in their account. For example, if you deposited 100 Ethereum tokens, you’d currently earn a yearly interest of $925.59 per year. At current prices that represents a return of nearly 4%.
Depositing 2 Bitcoin would earn about $780.33 in interest over 1 year. That makes for a slightly higher rate of just over 4%.
While not a huge return, if you compare it to what you’d be earning in a deposit account with a high street bank, it’s very respectable. If you’re planning on holding coins for the long term, this could be a great way of passively growing your digital asset portfolio.
In general, higher interest rates are given on stablecoins. On USD coin (USDC) for example you can earn 8.7%. This means, a deposit of $20,000 in USDC would give you a monthly income of around $145.
Another handy option is that you can choose to receive interest either in fiat currency or crypto coins. In addition, higher rates are available if you opt to be paid in Celsius’ own platform coin. If you choose to receive your interest in coins, then your return compounds over time because new coins are contiually added to your account.
So where does the interest come from when you deposit your crypto coins? Most lending platforms will loan out your deposited coins to third parties. Then they will earn a profit in the same way that a bank earns fees from the spread between the lending rate and the borrowing rate.
Gold with a real rate of return
Tether Gold is a crypto commodity backed by physical gold and is fully recorded on the blockchain. The company behind Tether Gold is TG Commodities and they state that each token represents one troy ounce of fine gold stored in a secure Swiss vault. When you own a Tether Gold token you obtain ownership on a specific gold bar that’s identifiable with its own serial number. This of course is fully verifiable on the blockchain.
Provided you have enough tokens, you can also redeem your holding and take delivery of physical gold bars.
Tether Gold works just like any other cryptocurrency. That means that you can buy it, sell it or transfer it to another wallet address all in a few clicks.
While physical gold incurs monthly storage and insurance fees, with Tether Gold the fees are taken from the spread when buying and selling coins from the provider.
You can also earn interest on your digital gold by placing your coins on deposit through a lending platform. For instance, Celsius offers a 3% annual interest if you deposit Tether Gold coins with them. One advantage of holding digital gold as opposed to physical gold is that interest is compounded. You can have the interest paid in Tether Gold coins and this is paid into your account each month. This way your physical gold holding accumulates and compounds over time.
Earning compound interest on gold bullion is a good alternative for those willing to loan out their asset. This contrasts with paying storages fees for physical gold or gold ETFs. These fees eat into profits month after month, especially in the case of gold ETFs where there are also management fees on top of storage and custody charges.
Borrowing fiat currency
Another place you can lend your cryptocurrencies is through BlockFi. BlockFi currently offers slightly higher interest rates than Celsius does on Ethereum and Bitcoin. However, there are fewer coins to choose from. Their interest rates are 4.5% on Ethereum and 6% Bitcoin respectively at the present time. There’s a second tier for Bitcoin, which means you earn a lower interest of 3.2% on deposits of more than 5 coins. You can have interest paid in the unit of your choice. When you’re paid in coins your income compounds month-on-month.
If you need fiat currency, BlockFi lets you loan against your crypto assets. If you were to take a loan of $10,000 you’d need to deposit just over 2 Bitcoin as collateral. These Bitcoin are locked in your account until the loan is repaid. This represents a 50% loan to value, which is fairly standard among other crypto lending platforms.
A loan provides a way of unlocking value from your crypto holdings which may be sitting idle in cold storage or in an exchange wallet. If the value of your cryptocurrency goes up, you can withdraw some of your coins held as collateral. It’s worth keeping in mind though that you will be required to deposit more coins if the value goes down.
If you prefer a peer-to-peer or defi service there are those too. Coinloan.io lets you lend your cryptocurrency and earn interest for as short a time as one day.
Risks of cryptocurrency lending
There is of course no free lunch. What you have to remember when lending a cryptocurrency and receiving interest is that you are making an unsecured loan. Just like when you put money in a bank account, you become an unsecured creditor of the institution you’re depositing your coins with.
Cryptocurrency lending platforms don’t typically hold assets in their own secure custody, as an exchange would. Most will lend out assets that they hold to other institutions to make a return.
Therefore, unlike holding coins in your own wallet, you are exposed to risk of counterparty default. While the risk may be small, it isn’t zero and that’s the reason you’ll be paid interest.
While the number of offerings for lending and borrowing in the crypto space is relatively small at present, it’s growing at a rapid pace. We can expect to see more providers and new and exciting ways of earning a return on our crypto assets in the future.