Should You Use Crypto Margin Lending to Make Money Online?

Marcel Deer
By Marcel Deer
Kirsty Mac Dougall
Edited by Kirsty Macdougall

Published July 2, 2022.

Candlestick chart Downtrends on mobile screens and stacks of coins, cryptocurrencies, forex trading ideas

Crypto investors can borrow crypto from lenders who earn passive income from their investments via interest rates. So how does crypto margin lending work? Keep reading to find out.

How Does Crypto Margin Lending Work?

Borrowers can receive crypto loans through the lending platform, which uses the cryptocurrency lenders have already deposited to fund these loans. The borrowers repay loans with interest, while lenders earn interest in cryptocurrency depending on the amount they've deposited. First, let's talk about margin trading and crypto lending.

What Is Margin Trading?

Since the lending market exists, margin trading is possible. Many lenders are willing to provide loans to traders. They are capable of investing in exchanges and coins. Lenders benefit from interest.

Margin trading provides the trader with the choice to open a position that has leverage attached to it. For example, if you open a margin position with 2x leverage and your base assets increase to 10%, your position yields 20% due to that extra 2x leverage.

What Is Crypto Lending?

Crypto lending is a form of DeFi that enables investors to lend cryptocurrencies to various borrowers. Lending platforms are the link between digital asset investors and borrowers of said assets. The best crypto lending platforms typically offer very appealing APY on different tokens if you're looking to earn income on your investments.

The APY in crypto stands for annual percentage yield. Therefore, it refers to your compounded return per year in percentage form.

Lenders earn from interest payments, also called "crypto dividends." Multiple specialized platforms that focus on lending will also accept stablecoins in addition to crypto.

Crypto lenders make money via their DeFi loans. Digital tokens may be loaned to investors or companies, who may use the tokens for hedging or as working capital. If you are wondering how crypto tokens work, they are a form of digital currency representing a tradable asset.

When Is Crypto Margin Lending Used?

When traders utilize the leverage on margin trading exchanges, they use more capital than they have. This concept is similar to any other loan. Traders do this through collateralization, where borrowers use their deposits as collateral for short-term loans, and lenders complete this process by offering their capital for the loan in interest.

Most big-name exchanges offer some types of margin trading on their platforms. In addition, certain exchanges enable peer-to-peer lending, which uses a unique matching engine designed to bring liquidity to providers and traders alike.

Advantages of Crypto Margin Lending

Margin lending is a popular service because it allows clients to borrow assets they otherwise wouldn't have. A credit score is also typically not a requirement on most crypto lending platforms. Another benefit is the lack of paperwork, plus lenders can earn from the interest rates.

While USD lending rates track the cryptocurrency market's volatility, USD margin lending doesn't expose trading capital to fluctuations in price. In addition to the lack of capital drawdown risks, margin lending returns provide investors with tax efficiency as fund returns would probably be taxed as capital gains tax rather than income tax.

Disadvantages of Crypto Margin Lending

Your risk increases when you choose to invest heavily in one single exchange. Think of the phrase, "Don't put all your eggs in one basket." If something unforeseen happens to that basket, you will lose all your eggs.

Another problem is counterparty risk, mitigated by lending across various exchanges and stablecoin types. Margin lending exchanges also implement risk control that ensures traders do not have a negative net equity position. In serious events, insurance pools are in place to refund the lenders.

Lastly, you'll want to remember crypto slippage, the effective loan-to-value ratio changing with the ever-changing market fluctuations. Slippage can be a positive or a negative, as positive slippage can secure better rates for buyers, while negative slippage provides worse rates.

Can You Make Money Through Crypto Margin Lending?

Blockchain technology goes hand-in-hand with financial opportunity. The same principle goes for the margin lending space, as virtually anyone can lend their assets and earn rates that the banks and institutions have been milking from us for years. Specific platforms have enabled interest rates that could be 10x or more than what is available in the traditional market.

The bottom line is that the volatility of cryptocurrency is the primary motivation for margin lending volume growth since higher volatility encourages trading activity.