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Author Topic: Lending to the margin traders: a way to grow your Bitcoin  (Read 9477 times)

wiser

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Lending to the margin traders: a way to grow your Bitcoin
« on: May 26, 2015, 06:03:17 AM »
Before the arrival of the DNotes Vault Retirement CRISPs, it was actually very difficult to find a reliable way to simply earn interest on cryptocoins. There is no shortage of websites claiming to double or triple your Bitcoins in just weeks or even days, but those sites are most likely Ponzi schemes so not recommended. You can also buy dividend paying Bitcoin stocks on websites like Havelock Investments, but then your funds are tied up in shares and always at risk of losing value if the share price goes down. Even the DNotes vault retirement CRISP ties up your funds for a minimum of five years, and anyway, it's only for DNotes. What if you want to grow your Bitcoin holdings without tying them up for years and without putting them at risk of losing principle?

The trading platform Poloniex very recently began to support margin trading. In a nutshell, margin trading means trading with borrowed funds rather than your own funds. Using borrowed funds means that the margin traders pay interest on those funds. They also have to back up those funds with collateral kept in their margin accounts to be sure they can pay them back.

This is not going to be a tutorial on margin trading. This guide is about the other side of margin trading--lending your funds to the margin traders at interest.

Since Poloniex opened up margin trading, the going daily interest rate on the borrowed funds has hovered right around 0.039 percent per day. If you multiply that by 365 days, the annual interest rate comes out to right around fourteen percent--twelve percent once you take into account Poloniex' commission. Compared to the interest rate you might get on a fiat bank savings account or CD, twelve percent is a very healthy rate of return. There is no guarantee that this interest rate will hold, but that's where it is now. May 29, 2015 update: Actually, the daily interest rate on lending out Bitcoin has shot up to over 0.2 percent. For whatever reason, margin trading is very popular right now.

The risk of lending funds to the margin traders is very low. Poloniex is set up to make sure that those funds along with agreed interest rate get paid back. A margin trader needs to have at least as many funds in his margin account as he is borrowing. If the cost of his margin position exceeds the funds used as collateral, then Poloniex automatically closes the position and the funds are returned to the lender. The process is automatic. If a trader doesn't have the collateral to make good on a loan, he won't be able to take out the loan in the first place. I'm not going to say that there is no risk here, but it appears that the bulk of the risk is mitigated by the platform itself. It then comes down to how reliable is the platform. Poloniex has an excellent reputation; however there's always the chance that the site could get hacked and funds stolen. As with all investments in the cryptosphere, only invest what you can afford to lose.

Loans made to margin traders are short term loans. The lender sets the maximum duration and interest rate, and the borrower can take it or leave it. Two days is a typical loan duration, though a loan can be extended for as long as sixty days and possibly longer than that. When a loan is offered, it can be set to autorenew, meaning that when the time is up, the borrower can opt to take out the same loan again from the same lender. The borrower can also pay back the loan early. He likely will if he can snag a different loan at a lower interest rate. The reason for a lender to keep the loan duration short is to quickly adapt the interest rate to fit market rate.

While the lender's funds are borrowed, they accumulate fees based on the interest rate. When the loan comes due, those fees are paid to the lender minus the fifteen percent cut that Poloniex takes. In this way, the lender's funds grow daily at the going interest rate.

Lending Bitcoin to margin traders is simple. First you need to transfer some Bitcoin from your exchange account to your lending account. Your exchange account is the default account for all your funds. When you make a deposit to your Poloniex account, it goes into your exchange account. To transfer it to your lending account, click on the [Transfer Balances] button under [Balances] in the top navigation bar, and a table showing how all your funds are allocated comes up. Above the table is a simple form to request a transfer. Simply enter the amount of Bitcoin you wish to transfer, indicate the account you wish to transfer it to, hit [Transfer], and the transfer happens instantly. Transfer any funds you wish to lend out to your lending account. You will notice that you can lend a few other cryptocoins, including Litecoin and Dogecoin. The interest rates are different for each coin, but the process works the same way.



Now that you have funds in your lending account, you can offer a loan. Click on the [Lending] button in the top navigation bar and the lending platform comes up. At the very top is the form you complete to offer a loan. Select the amount of your loan--if you want to offer all your funds, just click on the amount and it will populate to the form--and the lending rate and duration. The smallest amount of Bitcoin you can loan out is 0.001 BTC. That minimal amount, by the way, can be earned with just one week of aggressive faucet claiming. Check the autorenew box if you want your loan to autorenew. Leave it blank if you do not want to loan out those funds again once the loan is due. Click on [Offer Loan] and your offer is now out there.




Your loan offer will be shown in the My Open Loan Offers box until a borrower picks it up.



It will also get added to the Loan Offers side of the order book. The loan order book works just like a trading order book. The lowest interest rate offers are at the top and borrowers will pick up those loans before getting to the ones with higher interest rates. How quickly your loan gets picked up depends on how competitive your interest rate is.



Once your loan gets picked up by a borrower it will show up in the My Active Loans section. The amounts you offered can get split up. You can turn the autorenew on or off within this chart just by clicking on either [on] or [off] to change it. The green numbers under Fees represent the actual interest you are earning in real time.



If you keep autorenew on, your loan will automatically be offered again and again. As long as your interest rate is competitive, it will keep getting picked up too. If your interest rate is either too high or too low, you can turn autorenew off, and once the current loan comes due you can choose a new interest rate when making your new loan offer. You can also cancel an open loan offer and put in a new loan offer at a different rate.

You will want to turn off autorenew so that you can offer a new loan if your interest rate is either too high or too low relative to market rate. If it is too high, your loan offer will be stuck as an open loan offer for a more extended period of time. There's nothing wrong with holding out for a higher interest rate, as long as you understand that your funds are not earning interest until your loan becomes active. If your interest rate is higher than market rate, your borrowers are likely to pay off your loan early and pick up a new loan with a better interest rate, which will send your loan back to the My Open Loan Offers section. If your interest rate is too low compared to the market rate, then you are missing out on collecting higher fees, though your borrowers will consider themselves to have found a bargain. In any case, you can't adjust the rate for an active loan. You have to wait until the loan is paid back and then issue a new loan offer.

I have been lending out my Bitcoin to margin traders on Poloniex for several weeks now. I do have to monitor it since the interest rates change quite a bit, but the process happens on its own once I initially offer a loan and opt for it to autorenew. I suggest staying logged into Poloniex and leaving the Lending tab open in your browser throughout the day. Then you can check on your loans and make any adjustments as needed. If you are going to be putting a lot of funds up for loans, be sure to active two factor authentication. Once you get the hang of it, monitoring your loan offers and making interest rate adjustments as needed is very easy and takes very little time. Overall, lending funds to margin traders on Poloniex seems to be an easy and low risk way to grow your Bitcoin stash.


Found this tutorial helpful? Tip my DNotes vault: DoQA9sja4vzPwV2MtuNweCh1miw5qHF2xc
« Last Edit: May 30, 2015, 04:31:13 AM by wiser »
Want to know what's going on in my little corner of the Cryptosphere? Check out my blog: Creative Currencies  Latest post: I can do it better with Bitcoin... or at least smaller


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