There is a fallacy that Bitcoin has no CashFlow. That’s what Warren Buffet thinks.
Wrong. Bitcoin has Cashflow.
Where is the Cashflow?
- Lending to Margin-Traders at Exchanges
- Hard Forks
- Arbitrage of the Basis (Contango or Backwardation) of Bitcoin Futures at BitMEX, OKEX, CME & CBOT
I am just going to treat Lending at Exchanges for now. (Might treat income from HFs and Arbing the Basis in follow-up pieces.)
Lending at Exchanges
You can lend your Bitcoin at BitMEX, Poloniex and Bitfinex. Annual compounded rates of over a million percent are sometimes available. The previous sentence does not contain any typos. I provide evidence of that 1,000,000 % below.
You can lend USD as well at Bitcoin to margin traders at Bitfinex. In Real Life savings rates are about 1% annually in the advanced economies of the OECD. In the Bitcoin world annualised USD rates of greater than 100% are often available, specifically when the market is super bullish. How is this possible? Traders at Bitfinex wishing to buy Bitcoin on leverage need to borrow USD to do so. It is the other users of the exchange who lend them these dollars. But USD is in short supply at Bitfinex at such times because everyone wants to be holding Bitcoin not dollars for the price appreciation.
But I want to focus on Bitcoin lending and demonstrate that Bitcoin cashflow. Lending at BitMEX often offers the better rates than the other exchanges, but it is a little tricky so I will quickly deal with Polo and Bitfinex first.
Lending at Poloniex
You can lend BTC to margin traders at Polo who are going Long on ALTBTC positions with leverage. (They need to borrow BTC to pay for the ALT positions.)
When Alts are pumping you will get a great Lending rate; rates will be modest when Altcoin markets are quiet of falling. Rates can go batshit when there is volatility incoming.
Rates exploded in the run-up to the Bitcoin Cash Hard Fork on 1 July 2017. The reason was every man and his dog moved their BTC off the exchanges into cold storage to ensure they received their Bitcoin Cash. So there was very little Supply of Bitcoin available for Lending.
How to earn this interest? It’s easy. Move BTC to your Polo Lending Wallet and offer them for Loan under the Lending tab. You need to set an Amount, a Duration, and a Rate. Set a rate that is in line with the market as seen in Loan Offers . If you try for too high a rate your Offer will not get filled. You can ignore the Loan Demands table.
Lending at Bitfinex
Lending is called Funding at Bitfinex. (And confusingly, Funding at Kraken means Deposits and Withdrawals.)
a. You can lend BTC to fund margin traders at Bitfinex who are going Long on ALTBTC positions with leverage.
b. Bitfinex also offers BTCUSD margin trading (unlike Polo) so you can lend BTC to those going Short on BTCUSD . (You need to possess BTC to sell it.)
c. You can also lend USD to traders going Long on BTCUSD and ALTUSD. USD rates at Bitfinex tend to dwarf those available In Real Life.
Again, it’s easy. Move BTC or USD to your Funding Wallet. Then go to the Funding Tab and make your Loan Offers, setting an Amount, a Period and a Rate.
When a BTC offer is taken by a trader, the BTC in your funding wallet will be used by the trader to sell bitcoins (open a position). When the trader completes a trade by closing the position, they buy BTC and which returned to your wallet.
Use the Auto-Renew feature to avoid a lot of donkey work. More info. on Funding at Bitfinex.
There are great stats available on Bitfinex Funding.
So at time of writing (20 May 2018) $720 million are being lent out at Daily 0.065% / 26% annualised, and 50,000 Bitcoin with value of $415 million at 0.01% Daily / 3.6% annualised.
Lending at BitMEX
Earning interest income at BitMEX can be highly profitable but it is not so straightforward as lending at Poloniex and Bitfinex.
When net sentiment in the XBTUSD market is bullish, you earn funding income by shorting the XBTUSD Swap contract. (Shorting Bitcoin essentially means you are holding a USD position.) This was the case for most of 2017.
When net sentiment in the XBTUSD market is bearish, you earn interest by going Long the XBTUSD Swap. Ths has applied to most of 2018.
Note that when the objective is to maximise funding income then you must use small Leverage and avoid getting Liquidated. Note too that funding income is only available on the XBTUSD swap, not on the Bitcoin Futures contracts.
How to find out if you should go Long or Short to get the Funding?
The Funding Rate for the current 8-hour Session is displayed in the Contract Details box bottom-left.
The Funding History page shows the history.
Interest is paid every 8 hour period, so 3 times a day. At 4am UTC then at midday UTC and then at 8PM UTC.
When you are shorting Bitcoin your position (Unrealised PNL) will change according to price of Bitcoin, until you close your short, at which point you will turn it into a Realised PNL. But your interest payments will be realised (Realised PNL) every 8 hours and come into your account.
Whe you are comfortable with shorting with 1x leverage, you can try 2x. Shorting on 2x allows you to keep some of your Bitcoin in cold storage, so you are exposed to less counterparty risk to BitMEX. Watch the market and add extra margin if the price rises close to your Liquidation price to avoid Liquidation.
More detail on this trade in this essay: XBTUSD The Philosopher’s Stone and Earning Interest Income on XBTUSD with Minimised Risk.
Check the Market for Lending
Rates (Daily) at 19 May 2018.
Rates (Annual compounded) at 19 May 2018.