According to an old proverb, wealthy people do not work for money. Rather, they employ money to work for them. Apart from real estate investing or possessing a million-dollar dividend stock portfolio, it is difficult for the average person to produce a passive income. However, your crypto assets may alter this. Lending is a well-known passive method of generating money on your digital assets. Numerous peer-to-peer (P2P) lending platforms allow you to deposit your cryptos for a specified period of time in exchange for interest payments later. The interest rate is set by the platform and depends on current market rates. This strategy is well-suited for long-term investors seeking to expand their portfolios with little effort. It's worth noting that locking capital in a smart contract carries a number of dangers that investors should be aware of. As such, I will present a full assessment of several crypto loan companies in terms of their offerings and underlying business strategies in order to assist investors in making informed decisions.
Blockfi: This is one of the most well-known bitcoin platforms for generating passive income from your cryptocurrency holdings (https://blockfi.com/). BlockFi, unlike other cryptocurrency exchanges, also acts as a crypto bank, providing loan services and interest-bearing accounts. The primary reason why investors choose BlockFi is for interest-earning accounts. Consumer and corporate loans are among the other BlockFi options. Users of BlockFi can send money by wire transfer or ACH. BlockFi transforms fiat currency into Gemini Dollars (GUSD) and deposits it in the BlockFi Interest Account (BIA), where it earns a 9.5 per cent annual percentage yield (APY) until investors utilise it to buy cryptocurrencies. BlockFi's growth strategy was greatly influenced (and continues to be) by financial services company SoFi, one of the firm's first seed investors. SoFi began with student loans and has subsequently expanded to include mortgages, personal loans, and checking and financial management tools. The idea is to cultivate a devoted user base around a single primary product. Typically, this product enables businesses to collect a significant amount of data — in the case of BlockFi's loan offering, this included credit scores and existing crypto holdings. This information was subsequently used to develop the company's second product, an interest account, which informs the launch of subsequent products and services.
Interest fees, rehypothecation, withdrawal fees, spread, Bitcoin trust, and mining are some of the ways it makes money (see Figure 1).
Figure 1: How Does BlockFi Make Money? (https://fourweekmba.com/how-does-blockfi-make-money/)
Interest Fees: As I previously stated, Blockfi's biggest selling point is its interest-paying accounts. It's no surprise that interest fees account for the majority of Blockfi's revenue. BlockFi's lending arm allows users to earn interest on their existing crypto balances by lending to other crypto firms, which in turn pay BlockFi interest on that cash, part of which is returned to the user. On their crypto assets, lenders can earn up to 8.6% APY (annual percentage yield). Borrowers can borrow collateral based on a 50 per cent Loan to Value under its lending provisions (LTV). As a result, they can only utilise half of the value of their crypto assets as loan collateral. Interest rates are calculated using the amount of collateral deposited as well as the amount borrowed. Fees are also determined by the length of time it takes to repay the loan, with interest rates starting at 4.5 per cent.
Withdrawal Fees: If a customer wants to withdraw funds from a BlockFi account, the company, like many other crypto platforms, levies a transaction fee if the weekly withdrawal limit is surpassed. The fee structure is determined by the type of cryptocurrency being withdrawn.
Trading Spreads: Trading spreads is a common way many fintech solutions, including Blockfi, generate revenue. Spread is the difference between the BUY and the SELL price. Due to the fact that all cryptocurrency trades are routed through BlockFi, the corporation can send such transactions to the highest bidder. In the example above, if two distinct traders are willing to place a BUY order concurrently, the order will be awarded to the trader paying the greater price.
Rehypothecation: Rehypothecation is a complex but regular procedure in which a financial institution repurposes collateral assets pledged to it as if they were it's own. Both bank deposits and loan collateral are included in these assets. BlockFi lends deposited cryptocurrency to other institutions in order to earn interest fees or profit from price movement speculation in some situations.
Bitcoin Mining: In May 2021, Blockfi expanded into Bitcoin mining in conjunction with Blockstream. BlockFi has deployed miners at the Blockstream cryptocurrency mining facility in Georgia, United States of America. The company will strive to diversify its revenue streams and grow its services by accumulating bitcoin on its balance sheet, where it will have access to over 300MW of electricity capacity. BlockFi intends to earn money by mining and amassing bitcoins.
In spite of its solid user base and growth, BlockFi has faced several challenges, including hacking attacks and regulatory setbacks. However, it has exceeded $1 billion in valuation and continues to enjoy the patronage of financial heavyweights and venture capitalist funds. Based on its rising popularity, institutional support and diverse business model, Blockfi is arguably a sensible platform for crypto-lending.
Coinloan: CoinLoan is a platform for lending secured on crypto-assets (cryptocurrency, tokens) by offering crypto-backed loans and interest-earning accounts (https://coinloan.io/). Users can earn daily compound interest of up to 12.3% on eighteen supported cryptocurrencies, stable coins, and FIAT on the platform. Through innovative financial solutions, the site enables users to borrow, swap, and develop their assets. Unlike many other sites, there is no distinction between who can be a lender and who can be a borrower on this one. This permits individuals to take on the roles of both borrowers and lenders at the same time. Volatility is synonymous with cryptocurrencies. The business strategy of CoinLoan tries to combat this volatility by ensuring that each loan is overcollateralized. Users can only borrow up to 70% of the value of their collateral. The 30% reserve allows CoinLoan to take action in the event of a market downturn. When necessary, the platform sells collateral promptly and automatically, returning the funds to the lender, together with any earned interest.
Coinrabbit: The platform claims to be an instant crypto-lending service (https://coinrabbit.io/). Borrowers can borrow stablecoins such as USDT for 14% APR for an unlimited against their cryptocurrencies (such as Bitcoin) without having to sell. Like Coinloan, Coinrabbit also follows the strategy of overcollateralized loans. For instance, if an individual decides to borrow against (and assuming 1 BTC is equal to $40.000), then they can expect to receive 20,000 USDT. Figure 2 clearly shows how crypto lending works on Coinrabbit:
Figure 2: Crypto lending on Coinrabbit (https://coinrabbit.io/blog/what-is-crypto-lending-coinrabbit)
Bitcoin seems to be the preferred collateral for this platform and the use of highly volatile crypto assets such as $SHIb is discouraged. In addition to LTV, the platform also
YouHodler: Like its other contemporaries, YouHodler (https://www.youhodler.com/) allows its users to use their crypto as collateral to get instant cash loans and cryptocurrency loans in EUR, USD, GBP, CHF, Tether (USDT), or Bitcoin (BTC). On some crypto-assets such as USDT, the lenders can earn up to 12% APR along with compounding interest. One thing that distinguishes YouHodler from its peers is its Turbo-charged loans. This product helps users multiply their crypto using just a small amount of starting capital through a series of loans that YouHodler calls a “chain of loans". This product, which is unique to the platform, allows the user to use crypto as collateral for a loan to help you buy more crypto. This amount will be used as collateral for the first loan in the “chain of loans" with the users choosing from three to ten loans. However, to access these multiplied amounts of crypto, the user must first pay back the initial loans. Turbocharged loans too are underpinned by LTVs and follow the schema shown in figure 3:
Figure 3: Turbocharged Loans With YouHodler (https://jeangalea.com/how-to-use-youhodler-turbo-loans/)
Availaing this loan takes patience and financial planning. Say a user bought 1 BTC when the price of BTC was $8,000. They then used that 1 BTC as collateral for a Turbocharged Loan that multiplied it to 6 BTC. When the loan is paid off in 30 or 60 days (depending on the plan) then the user has 6 BTC. This is certainly innovative but I would recommend this passive income strategy for advanced crypto-investors.
References
