In recent years, the popularity of crypto lending for a profit has increased significantly.
Favorable rates on crypto assets of more than 10% a year, when rates on regular savings accounts are close to zero, are attracting investors to cryptocurrency lending platforms that pay interest.
There are several dangers in using some of these platforms; they’re located outside of Australia and aren’t subject to Australian consumer protection rules.
However, the popularity of digital currency lending platforms has prompted local crypto companies such as Swyftx and Finder to examine how they might offer interest on cryptocurrencies in order to expand the appeal of digital currencies to a wider audience while keeping risks low.
Individuals who possess bitcoin or tether may generate regular income by loaning the platforms their digital currency through crypto lending platforms.
The software, like other fintechs, makes it simple for individuals who own Bitcoin to join up and start earning interest – it only takes a few minutes.
The investor’s crypto assets are immediately supplied to the platform.
Investors receive interest on crypto assets, which is supposed to be paid out every day, weekly, or monthly.
There has been a significant rise in interest in crypto lending platforms that offer to pay a return on crypto assets, according to Tommy Honan, head of strategic partnerships at Swyftx, an Australian cryptocurrency exchange.
The cryptocurrencies loaned to the platforms are frequently used for “leveraged” cryptocurrency trading and lending to corporations and hedge funds, according to Honan. The platforms, on the other hand, may lend to anybody as they choose.
Annualized interest rates are provided on crypto lending platforms, but they aren’t fixed for a set length of time. The rates are subject to frequent change.
There are several dangers. There’s a chance of the crypto loaned price plummeting, as well as concerns about the lending platform itself.
Investors have no legal remedies if a foreign-based exchange is hacked or simply vanishes.
Price fluctuations of more than 10% in a single day are not uncommon, and they might be frightening, especially for investors looking for yield.
Hema Raman, the Australian Securities and Investments Commission’s crypto asset co-ordinator, describes cryptocurrencies as “highly speculative investments” that are “technologically complex, globally and online.”
“In most cases, these characteristics make it extremely tough to tell genuine companies from fraudulent ones,” Raman explains. “There’s always the danger of being defrauded.
People shouldn’t think of crypto yield platforms as simply depositing money with an Australian bank, according to Chris Brycki, the founder of Stockspot, an online investment adviser and fund manager.
“As with every other investment, there is a basic connection between risk and return, and if you’re receiving returns that are many greater than those available on cash in the bank, you have to be concerned,” Brycki warns.
The most common stablecoin is Tether, which is linked to the US dollar. Investors who want to reduce risk may first convert their cryptocurrencies to “stablecoins”, whose value is typically linked to the US dollar. Tether is the most widely used of these.
Stablecoins are backed by real currencies that are kept in a bank account.
The investor will get a better interest rate than they could obtain elsewhere, with relative stability of their loaned crypto, if everything goes to plan.
However, using stablecoins is still no guarantee that investors will not lose their money.
In June, there was a spectacular surge in the Iron Finance crypto lender. Its Iron Titanium Token, which was based on an “algorithmic stablecoin ecosystem,” offered an annualized interest rate of more than 200 percent.
However, a number of large investors sought their money back at the same time, which resulted in what was dubbed the world’s first large-scale crypto bank run.
There wasn’t enough cash to repay investors, and the token’s value plummeted.
According to Finder co-founder Frederic Schebesta, the company is developing “Finder Earn,” which will allow investors to earn interest on their cryptocurrency assets.
By the end of October, the software is expected to be included in the Finder software. The firm increased bitcoin trading functionality in its app recently.
Other major Australian crypto firms, such as Swyftx, are also considering how to offer interest on cryptocurrencies.