How Crypto Lending Platforms Are Encouraging Short Markets

in LeoFinance2 months ago

Hey Jesspeculators

The growth in crypto tokens in US dollar value, lending rates, yield farming and price action, has attracted all sorts of institutional players sh institutional products into the blockchain space!

Both DE-FI snd CE-FI are using blockchain based tokens as assets to issue loans both with their own pros and cons. This new financial system is not bogged down by debt which means they can offer market interest rates. 4-6% APY sounds pretty reasonable for risking your capital.

It just seems absurd in a world of super low-interest rates and negative interest rates, that we live under today. These attractive interest rates, give speculators more room to play around, take a risk and the secure yield on attractive spreads in the market.

The crypto market is still wildly inefficient. With this kind of price discovery and volatility, liquidity issues and more, arbitrage traders and short traders find that crypto can become their new home.

Fractional to over collateralised

In traditional finance a loan can either be issued on a fractional reserve basis, you put 10% down and can loan at leverage up to 100%. In some cases, businesses can issue bonds at less than 1% and create new credit.

In a fractional reserve world when you make a loan its creation of new money. It's a system we all grew up with and never questioned until now.

In a crypto world, we work on asset-based debt, where you have to collateralise your loan OVER if I want a loan I need to provide capital before I can get the loan.

Today, Bitcoins price is $50 000; I could put in 1 BTC and get a loan of $25 000.

Alternatively, I could put in $50 000 and get a loan of 1 BTC.


Who is grabbing over collateralized loans?

So you probably think if I have $50 000 why would I want a loan of $25 000 in another asset, that's not very smart. I already have the money, why would I need to borrow less and STILL pay a 9% interest on the loan.

A crypto loan has several benefits, if I needed capital and did not want to liquidate the crypto I could take my 1 BTC and go into the lending markets.

The tax efficiency

I secure a loan for $25 000, make the trades I need to make, or purchases I need to make and then pay back the $25 000 with a 9% interest based on the time frame I took it out I may pay a little more in nominal value.

Let's say I borrowed it for a full year to make it easier; I'd borrow $25 000 and pay back $27 250, and get my full 1 BTC back.

If I sold my BTC and got $25 000 I would have to pay 25% - 30% tax on that BTC and have even less so I'd have to sell more of my 1 BTC to get the $25 000.

The trade efficiency

I am a market maker, and I see some attractive arbitrage opportunities on a coin like BAT. I can put in $200 000, for example into a lending platform. Secure $100 000 worth of BAT, Load that up on to different exchanges and then buy and sell based on the various pairs moving around across exchanges.

If I was a short seller, I could put in $10 000 000, secure $5 million in a certain token, dump that on the market, drive the price down, then pick it up again cheaper. Pocket the spread and then get my $10 000 000 back risk-free with a fat margin to spare.

These are just some of the reasons why lending markets exist and why people are getting paid premium to lend out their assets.

A win-win for everyone

Crypto lending markets are a win for everyone involved, passive investors can put their BTC for example to work for them securing a monthly return. Market makers, liquidity providers, short-sellers or tax-savvy individuals can leverage the other side and make attractive gains or savings.

It uses the capital more effectively, reduces volatility in markets over time, and bonus, it sucks more capital into these markets making them bigger and less volatile. As long as the spreads are there to be captured, you'll be getting sweet returns in the lending market.

I think the crypto market is way too small for these yields to be arbitraged down anytime soon, so lending markets are going to be booming for many years to come.

Have your say

What do you good people of HIVE think?

So have at it my Jessies! If you don't have something to comment, "I am a Jessie."

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It's nice to have that much money to play with. Is it possible to apply the same strategy with let's say a thousand dollars?

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Yes you can apply the same strategy with less than $1000 but then you wouldn’t do it for the tax saving since it most likely wouldn’t be applicable you would do a short term or as short as possible loan, repay it and keep your position so you can still enjoy price rises on your crypto

I am a Jessie,

As we speak I was loading up more funds onto the Binance Smart Chain. I really think it is going to be a game changer for leveraging my crypto that was just sitting there doing nothing. I can Earn on it with Venus but also pull out some equity and then buy other crypto. My main plan is to pull out the equity and then do Stable Coin to Stable Coin liquidity pools on Pancake Swap to earn Cake and I will use that to pay off the loans and buy other cryptos. Endless possibilities.

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I’m not that confident on BSC yet I have a couple of bones In there doing some work for me but I don’t see it as much of a game changer but an ETH supplement just like most chains it’s decentralized theatre and I’m no fan of binance. You never know when they’ll pull a fast one on you

I think BSC still has room to grow and continue to piggy back on ETH and it’s infrastructure but i don’t see it taking ETH out completely, BSC and TRON aren’t innovative products they just sit around wait to see what ETH does and copies it after a while they also stagnate since they’ve never had to come up with ideas of their own

I get what you are saying of them trying to sit back and scalp what other chains have had success with. I think at the end the fees are so high on ETH that the only thing that will drive real demand to it is just new people showing up buying into ETH but not ever move it off the exchanges. I just moved a bunch of ETH over to the BSC. I'm connecting with my Ledger but I am still concerned about security.

But it's not just ETH we must think of all the assets also stuck on ETH theres billions in WBTC stuck on ETH, there are a range of Wrapped and Native tokens all facing the same issue now so like you say smaller buyers are keeping in exchanges and that's probably also affecting the prices as less coins can move around, you effectively looking any coin value lower then lets say $1000 in my opinion because if you paying 20-30 bucks it only makes sense to give up say a 2-4% to move it other than that to me its a waste.

I have a Bit of BNB and bHIVE on BNB but don't plan on using the chain all that much, just like to mess with new things so I know what they are about. Last time I made the mistake of chasing so many coins, so this time I want to take my time and think about whats going on first.

Besides BTC is doing so well for me already I don't want to be greedy

Thanks for the example for the tax efficiency part. I've seen a lot of talk about that lately, but not with an example I understood.

I can see now it won't be of much use to me as I don't trade. Useful to know.

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If you want a better view on the costs, I wrote a post yesterday comparing leading rates to tax rates, its a bit crude but it will give you an idea on how to calculate it for yourself.

You can check it out here

It's gets confusing because lending is used in different ways I think. Many posts talk about lending when, to my mind, they are really talking about borrowing. I am not interested in borrowing which, after reading your post, is where the tax breaks seem to be.

From what I've read in UK tax forums, whether or not you can save tax on earnings from crypto you've lent out, is a grey area and hotly debated. HMRC doesn't recognise crypto as a currency so it's not clear whether these earnings would be treated as interest earned or miscellaneous income which have different treatments.

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I'm going neck deep in crypto lending platforms lol. The model of needing to have collateral first just makes so much sense and the interest rates are what any long term saver would drool over. If people are worried about "volatility" of crypto then why not just get a stable coin and earn 10+% on it instead?

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That's the trade-off I keep trying to explain you can accept faux stability with a guaranteed of you losing purchasing power over time,

Or you can accept volatility but be guaranteed that your purchasing power increases year over year.

How you want to play both sides is up to your risk tolerance

well it's true now a lot of people are doing it and its crazy to think that some even get a loan from banks and loan sharks to invest in crypto but I can work out but if not I don't know what to say

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I've seen stories of people taking out loans to buy crypto and to me that is some big ass balls to try that, I wouldn't be able to sleep at night if I pulled a move like that

me too I will never try something so risky and have trouble sleeping

Crypto lending is a new thing but I believe that it will get more attention. I like the concept of crypto leading and hope to see more innovation in this segment. you nicely shared about crypto leading.

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I think it’s only the beginning, we already see lending platforms looking to launch credit cards and other financial services so lending out your crypto to tap into these new credit markets has a long way to go

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I’ve only tried staking on apps but I haven’t tried the loans. The American tax thieves love to go after people in this territory so I don’t think I want to get into the foray yet. Once things spike more, we get a big sell off and buy back in a better position then I think I’ll be game for trying this type of stuff. The wife isn’t thrilled about paying taxes on internet money but she sees the profits made by doing it. I don’t know if I could convince her yet that this stuff is worth the risk and added cost of crypto software to track it lol

If I was US-based and had to deal with all your rules and level of enforcement I too would stay clear, maybe just buy Bitcoin and HODL and not chase so many alts and DE-FI. As crappy as the US dollar may seem it's still relatively decent to hold long term versus our currencies. I hold a few USD and EURO just in case our currency implodes faster than the usual 12% a year lol

Yeah at this point I’m going to quit using things like Celsius and just stick with buying what I can periodically. It’s better than the hassle of the government crooks right now. Eventually I think it will be a decent thing to do but not yet.

I’m also done trying to play any games, all I do now is buy $10 a day or Bitcoin and keep storing it for the long haul I am not about to do forensic accounting just so I need to tell you how much you can steal from me lol wtf does that even make sense

I take all the risk do all the work and then YOU tell me to go work out how much I must give you it’s laughable that this is the norm


Thank you for your engagement on this post, you have recieved ENGAGE tokens.

I think crypto-lending is needed for short selling as well. It's one of the better things to come out since the last bull run.

I think so too, I think there are plenty of coins that are overvalued and need to be shorted to show that they just a bunch of shit and there will be shortsellers doing their due diligence right now and looking for ways to short this crap

Interesting post you have, I been recently trying to figure out if there is a way to earn interest on HBD. Do you know of any? Like a platform similar to the ones you mentioned?

Not that I know of yet, I have heard that there are stuff in the works, but the best thing you can do right now is taking your HBD to convert it to USDT and putting it into celsius network or blockFI

The only issue I have with this lending is that if it spiral out of controll goverments will probably have to start regulate and that will affect all crypto. Hope it doesn't come to that

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How do you see it getting out of hand? In crypto lending at the moment, you have to be over collateralised, so if you don't pay your loan your collateral is liquidated so there's no real risk of systemic default

I'm thinking it's ways to get around that, but you might be right. This will probably enable alot more people in the world the chance to get a loan

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If they do fractional reserve loans in crypto I would stay away from those kinds of products, they don't make sense in an asset based world

A jessie. Have read today but nothing to contribute with more then a !BEER

Moral of the story is lending in crypto is going to be HUGE!!!

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thanks man. After half of you article I was lost. Not much energy here. Have not been able to drink coffe in 24 hours so you can guess (no problem just the stomach)

I like aave and I think that they are in front in this area. But - still on Ethereum which just now is not so perfect. I dont know how they have solve that. I see that Matic has go rocket since people search for other solutions than eth-mainnet.

I honestly havent been paying attention to anything on ETH because I can't afford to use the chain lol

I bouhgt my aave in septmeber at a time when the gas fee was normal...
If anything can be normal in crypto :-)

So you going to HODL till 2026 when ETH 2 finally comes

Dont ask me....
I have just join the Forced to Hodl Club.
But - My investmentplan is for 2028 so it is not impossible.

At least I know you’ll be stuck with me until you can unlock your ETH, as soon as that happens I expect my welcome to Sweden party to be paid for by ETH shit coins

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