On exchanges like Poloniex and Bitfinex you can earn interest by lending to margin traders. Margin traders are people who speculate with borrowed funds so they can increase their exposure. They need people to provide them loans and as such, there is a market for loans. If you like to know more about margin trading, read the document from Poloniex.
We place loan offers for your account on the exchange. By activating our service, your funds will be automatically loaned out in return for interest. By disabling trading and withdrawal access on the API, we can only place loan orders for your account. We (or hackers) therefore don't have the option to withdraw or trade funds from your account.
You could also do it yourself, however it is very time consuming; you would need to check on a very regular basis whether loans have returned so you can replace them again. Also, you would need to determine the interest rate for the loans. If the interest rate goes up after you've loaned out your funds, you could have potentially made more. We use an algorithm based on statistical analysis and current order book data to determine optimal interest rates.
Borrowers don't have the option to not repay the loan. The systems on Poloniex and Bitfinex enforce this. Margin traders cannot withdraw borrowed funds from the exchange. By engaging in margin trading they essentially create a 'contract' where they are exposed to the price fluctuations. The loan never takes longer than the approved upon time. Margin traders can return the loan before the end of the loan.
Yes, there are risks. The risks are mainly associated with having your funds on an exchange. The exchange could be hacked or be ceased. Another risk is that during a loan the currency you're lending in can depreciate in value. During the time of the loan (normally 2 days) you have no option to sell the currency.
A rare event can also occur where a sudden strong price fluctuation, combined with too little market liquidity causes that the collateral of the borrower does not prove sufficient to repay the loan. Poloniex and Bitfinex have safeguards against this by maintaining a certain 'safety buffer'. Until now this event hasn't occurred, however that does not provide a guarantee for the future. You have to decide for yourself if you think the interest rate weighs up against the risks.
Don't lend more than you can afford to lose. Since you are the main beneficiary of these loans, you are also the main bearer of the risk. We do not assume any responsibility if funds are lost.
More information can be found here.
It depends on the rates and your personal situation. Bitfinex verification is not required so you can start lending as soon as you have funds deposited on your Bitfinex account. At Poloniex you need to go through verification but this should only take a few minutes. USD and USDT deposits/withdrawals are not enabled on Bitfinex however you can freely withdraw and deposit cryptocurrencies.
Please refer here for a brief explanation about our algorithm.
Rates fluctuate constantly and vary depending on supply and demand for each cryptocurrency. The rates that are currently applicable can be found here.
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We charge a 5% commission on the earned interest, denominated in bitcoin.
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We support all currencies available for lending on Poloniex and Bitfinex: Bitcoin, US Dollar, Ethereum, Ripple, BitShares, Clam, Dogecoin, Dash, Litecoin, MaidSafeCoin, Stellar, IOTA, Neo, EOS, Omise Go, Bitcoin Cash, Ethereum Classic, ZCash, Sacramento, Monero, and Factom.
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