Best BTC lending rates in 2022

Crypto is definitely here to stay, and this is still just the beginning. According to a report by Insider Intelligence, 34 million American adults own cryptocurrency. This number is expected to rise. as more people are not only fascinated by crypto but also want to combat the uncertainty of the economy.

Bitcoin has come a long way since the early crypto adopter Lazlo Hayecz used 10,000 bitcoins to order two pizzas from Papa John’s. Spending is fun, but building passive income is even better, and lending Bitcoin is a great way to build more passive income.

Before you can get hold of your piece of Bitcoin lending cake, there are quite a few moving parts to be aware of from the start.

Important takeaways

• You can choose how much BTC you want to lend at any time.
• Trust is everything in Bitcoin lending; The platform you choose should have a good reputation.
• Lending your bitcoin has its own risks to be aware of; there are still no guarantees in crypto!

What is Bitcoin lending?

Bitcoin lending is the process of lending part or all of your Bitcoin holdings so that borrowers have access to the funds they need. In turn, you earn interest on the Bitcoin you lend. This is a great way to earn passive income on your Bitcoin holdings; You can see your balance grow over time with lower risk compared to active trading.

While borrowers must provide collateral to access crypto loans, this is not a full guarantee. There is still risk in lending Bitcoin; we will go over them in the sections below.

How Do Bitcoin Loans Work?

As with other cryptocurrencies, there are two paths to Bitcoin lending. The first is CeFi Bitcoin lending, which is through a centralized exchange. The other is DeFi Bitcoin lending, which is lending on a decentralized exchange, which requires a little more crypto knowledge to navigate.

Most lending is done through CeFi, how much of the heavy lifting has already been done for you. However, cryptocurrencies that potentially want to earn higher interest rates or have more control over the lending process can turn to DeFi Bitcoin lending. Each road has its own set of advantages and disadvantages.

CeFi Bitcoin lending

Since many people begin their cryptocurrency journey on centralized exchanges, where the learning curve is less steep, it only makes sense that CeFi Bitcoin lending is the most popular choice for users. After all, the crypto is already placed on the platform – and it is kept in your account after you make the purchase.

In addition, centralized exchanges have made it easier than ever to lend crypto. The platforms make money by lending crypto, and they pay some of the interest to the user to reward them for making that crypto available.

It is very common that there is a promotional interest rate for CeFi Bitcoin lending, and the interest rates vary by platform as well as over time.

Advantages and disadvantages of CeFi Bitcoin lending

Benefits of CeFi Bitcoin lending

Here are some more points about these pros:

• Simple: If you are already used to a centralized exchange, the lending process on CeFi platforms is built-in.
• Easier reporting: Easier reporting means that it is much easier to track transactions for tax reporting later.
• Quick deposits / withdrawals: Many centralized exchanges even allow transfers to or from debit cards versus traditional bank accounts.
• No smart contracts required: Since the stock exchange does the job, there is no need for smart contracts.

Disadvantages of CeFi Bitcoin lending

Just as there are advantages, there are absolute disadvantages to CeFi Bitcoin lending:

• Custody is required: When you hold your coins or tokens on a CeFi exchange, the exchange retains the custody of your crypto, period. What if they go up the stomach? It would be unusual, but is also a big risk – especially right now, while the market is experiencing a crypto winter.
• Higher confirmation required: Know Your Customer, or KYC, requirements are a real thing with centralized exchanges, which means they will confirm your identity. This can end up being a long process and can mean that you offer more information to the stock exchange than you are comfortable with.
• Danger of collapse: Stock exchanges want to do what is right for crypto users, but they want to prioritize operations. If that means they have to quit, they will. It puts your belongings at risk.
• Higher fees: The more a platform does for you, the more fees you can expect. With CeFi exchanges, you usually pay for the convenience factor in the form of higher fees.

DeFi Bitcoin lending

In many ways, DeFi is the other side of CeFi’s coin – especially when it comes to Bitcoin lending. Where the centralized exchanges are about control, the DeFi side of the coin is about making things as free as possible. Of course, this freedom comes with some drawbacks, including the need to navigate between blockchains, understand how Bitcoin packaging works, and to complete a process that includes much more complexity.

Yet power is also in your hands. With DeFi, your cryptocurrencies remain yours, and you can move them at any time.

If you want to borrow Bitcoin on a DeFi platform, you must either buy wBTC or “package” your existing BTC into wBTC, which represents Bitcoin but on the Ethereum blockchain. One wBTC equals one BTC, and they can be swapped back and forth in a 1: 1 ratio.

Advantages and disadvantages of DeFi Bitcoin lending

Benefits of DeFi Bitcoin lending

• Control over your crypto: The crypto always belongs to you, period. You retain control of your tokens and coins.
• No KYC requirements: There is no identity verification with DeFi lending; the verification requirements are much less demanding.
• More flexibility: You do not have to lend your entire crypto inventory; you choose how much at any given time.
• No intermediary required: With DeFi loans, you can actually drop the middleman, and work directly with the other party who borrows your crypto.

Disadvantages of DeFi Bitcoin lending

• More complexity: There is a lot more complexity involved in borrowing Bitcoin, so you usually need to be good at managing crypto between wallets.
• Problems with smart contracts: Smart contracts are powerful, but power comes with its own problems. Smart contracts have been the target of hacking attempts in the past and will probably also be at risk in the future.
• More transfers required: Not every crypto is on every blockchain, so you need to be prepared to move from one crypto to another. This can increase the cost of the total transaction.

Bitcoin lending taxes

Do someone really wishes to pay taxes? (If you do, you can take over our share; we don’t mind at all.) Still, taxes and money go hand in hand – and that includes Bitcoin loans.

It is important to understand that the interest rate obtained from Bitcoin lending is subject to be treated as taxable income for all purposes. How you should handle this is based on your specific tax jurisdiction; it is beyond the scope of this article to provide anything that could be construed as legal or tax advice.

Working with a tax expert who is crypto-conscious is ideal to ensure that everything is not only well reported, but that all taxes are also accounted for.

Recent thoughts on lending Bitcoin

Lending Bitcoin is a great way to use your crypto for passive income purposes. Why just let it sit there when you can take a lower risk way to increase your assets? Although nothing is guaranteed with crypto, Bitcoin’s explosive popularity means that there are still people who want to borrow this cryptocurrency, which allows you to earn interest in exchange.

It also works the other way with ease: If you need to borrow against your own holdings, you can do the same. Instead of withdrawing your Bitcoin and meeting capital gains tax, it is possible to go the loan route and reduce your total expenses. As always, there is more than one way to move forward in the crypto world.

Frequently Asked Questions

• Bitcoin lending is generally safe. In order for borrowers to be able to use your cryptographer, they must provide security, which increases the likelihood that the transaction will be completed without any problems. Although nothing is 100% safe, it is possible to have a low risk path to passive income through Bitcoin lending.

• Should I Lend My Bitcoin?

  It depends on your goals. You do not have to lend the entire Bitcoin, making Bitcoin lending a viable option for those who want to keep some of Bitcoin. Whether you decide to do so or not depends on your personal crypto strategy.

• Where is the best place to borrow Bitcoin?

  For ease of use and consistent rates on Bitcoin lending, Nexo is one of the best places to lend your Bitcoin. However, there are many options to choose from, so if Nexo does not appeal to you, there are many options.

• What are the risks of borrowing Bitcoin?

  Stock market collapse is one of the biggest risks of borrowing Bitcoin, but it is not the only concern. On the DeFi side, hacking attempts mean that wallets can be compromised and cryptocurrencies stolen. There is a risk with the DeFi side of crypto all together – it is not exclusive to lending Bitcoin.

• How Much Money Can I Make Borrowing Bitcoin?

  Bitcoin lending rates vary; It is important to check the stock exchange you are interested in first to find out how much you can earn on the amount you are interested in lending to borrowers.

• Do I owe tax on Bitcoin loans?

  It is possible to owe tax on Bitcoin loans, as the income earned from Bitcoin loans is considered taxable. As always, it is important to seek professional tax advice to account for all sources of income.