Cryptography certainly stays here, and this is just the beginning. According to a report from Insider Intelligence, 34 million US adults own cryptocurrencies. This number is expected to rise. Not only are more people interested in cryptography, but they also want to fight economic uncertainty.
Bitcoin has come a long way since early cryptocurrency adopter Lazlo Hayecz ordered two pizzas from Papa John’s using 10,000 Bitcoin. Spending is fun, but increasing passive income is even better, and lending your Bitcoin is a great way to increase more passive income.
There are quite a few moving parts you should know from the beginning before you can grab your part of the Bitcoin lending pie.
- You can choose the amount of BTC to rent at any time.
- Trust is all about Bitcoin lending. The platform you choose must be highly rated.
- Bitcoin lending has its own risks to be aware of. There is no guarantee for cryptography yet!
What is Bitcoin Lending?
Bitcoin lending is the process of lending some or all of Bitcoin’s holdings so that the borrower has access to the necessary funds. In turn, you are interested in Bitcoin you rent. This is a great way to earn passive income from holding Bitcoin. It is less risky compared to active trading and you can see the balance increase over time.
The borrower must provide collateral to access the crypto loan, but this is not a complete guarantee. There are still risks in lending Bitcoin. The following sections describe them.
How does Bitcoin lending work?
Like other crypto lending, Bitcoin lending has two passes. The first is CeFi Bitcoin lending, which is done through a centralized exchange. The other is DeFi Bitcoin lending. It is rented out on a decentralized exchange. This requires a little more cryptographic know-how to navigate.
Most loans are made via CeFi, and much of the tedious work is already done. However, crypto users who want to potentially gain more interest or have more control over the lending process can turn to DeFi Bitcoin lending. Each pass has its own strengths and weaknesses.
CeFi Bitcoin Lending
It makes sense that CeFi Bitcoin lending is the most popular option for users, as many people start their crypto journey on centralized exchanges where the learning curve is not so steep. After all, the cipher is already on the platform — and it will be retained in your account after you make a purchase.
In addition, centralized exchanges have made it easier than ever to lend cryptocurrencies. The platform makes money by lending cryptocurrencies and pays some interest to users to reward them for making them available.
It is very common to have a promotion rate for CeFi Bitcoin lending, and interest rates will vary by platform and over time.
Advantages and disadvantages of CeFi Bitcoin lending
- user friendly
- Simpler report
- Quick deposit and withdrawal
- No smart contract required
- Exchange is under crypto control
- Higher rates
- Further verification required
- Low APY
Advantages of CeFi Bitcoin Lending
There are a few more points about these strengths.
- Simple: If you are already familiar with centralized exchanges, it has a built-in lending process on the CeFi platform.
- Simpler report: A simpler report means that it’s much easier to track a transaction later for a tax report.
- Quick deposits and withdrawals: Many centralized exchanges also allow remittances to and from debit cards compared to traditional bank accounts.
- No smart contract required: There is no need for smart contracts as the exchange does the job.
Disadvantages of CeFi Bitcoin lending
Just as there are advantages, there are certainly disadvantages to lending CeFi Bitcoin.
- Needs storage: If you hold coins or tokens on the CeFi exchange, the exchange will stop managing cryptocurrencies altogether. What if they get angry? It’s rare, but it’s also a big risk — especially now, especially while the market is experiencing a crypto winter.
- Needs more advanced verification: The requirements of Know Your Customer (KYC) are genuine in a centralized exchange. That is, they will want to verify your identity. This can ultimately be a long process and may require you to provide more information than you are happy with the exchange.
- Risk of collapse: Exchanges want to do the right thing for crypto users, but they prioritize their operations. If that means they have to shut down, they will. It puts your property at risk.
- Higher rates: The more the platform does for you, the more you can expect to pay. CeFi exchanges usually pay a factor of convenience in the form of higher fees.
DeFi Bitcoin Lending
In many ways, DeFi is the other side of CeFi’s coins — especially when it comes to Bitcoin lending. If the centralized exchange is about control, the DeFi side of the coin is to make things as free as possible. Of course, that freedom has some drawbacks, such as having to move between blockchains, understanding how Bitcoin wrapping works, and completing a much more complex process. I have.
But power is also in your hands. With DeFi, crypto assets remain yours and can be moved at any time.
If you want to lend Bitcoin on the DeFi platform, you need to buy wBTC or “wrap” your existing BTC to wBTC, which stands for Bitcoin, but it’s on the Ethereum blockchain. One wBTC is equal to one BTC and can be swapped back and forth in a 1: 1 ratio.
Advantages and disadvantages of DeFi Bitcoin lending
- Control your crypto
- Less verification
- Increased flexibility with crypto assets
- No intermediary required
- More complicated
- Increased reliance on smart contracts
- Need more transfers between cipher types
- Potentially less support compared to centralized replacement
Advantages of DeFi Bitcoin Lending
- Control your ciphers: The code is always yours, the end. You hold control of your tokens and coins.
- No KYC requirements: There is no identity verification by DeFi loan. Verification requirements are much simpler.
- Increased flexibility: You don’t have to lend out your entire cryptocurrency. Always choose how much.
- No intermediary required: DeFi lending allows you to actually drop an intermediary and work directly with the person borrowing the crypto.
Disadvantages of DeFi Bitcoin lending
- More complicated: Lending Bitcoin comes with even more complexity, so you usually need to be good at managing cryptocurrencies between wallets.
- Smart contract issues: Smart contracts are powerful, but power comes with its own problems. Smart contracts have been the target of hacking attempts in the past and may be at risk in the future.
- More transfers needed: Not all ciphers are on every blockchain, so you need to be prepared to move from one cipher to another. This can increase the cost of the entire transaction.
Bitcoin loan tax
Someone actually I want Pay taxes? (Then we can take over our share. We don’t care at all.) Still, taxes and the means of making money are inextricably linked — and it includes Bitcoin lending.
It is important to understand that interest earned from Bitcoin lending can be treated as taxable income for all intents and purposes. How you handle this is based on your specific tax jurisdiction. Providing what can be interpreted as legal or tax advice is outside the scope of this article.
Working with a crypto-aware tax expert is ideal to ensure that not only everything is well reported, but all taxes are considered as well.
Final thoughts on Bitcoin lending
Lending Bitcoin is a great way to make good use of your crypto for passive income purposes. Why leave it as it is when you can increase your assets in a low-risk way? Nothing is guaranteed by crypto, but the explosive popularity of Bitcoin means that there are still people trying to borrow this crypto coin. This can be interesting in exchange.
It also works easily in the opposite way. If you need to borrow for your holdings, you can. Instead of withdrawing your Bitcoin and facing capital gains taxes, you can go to the loan route and reduce your total costs. As always, there are multiple ways to get things done in the crypto world.
Frequently Asked Questions
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