Earning interest on cryptocurrency

In this post, I’m going to explain how you can earn interest on your cryptocurrency and what the business models for offering interest are.

This is not financial advice.

Introduction

Bitcoin was released in 2009. For the first 10 years of Bitcoin and other cryptocurrencies, earning from your holdings only consisted of waiting for the price to rise. Since 2019, you can also earn interest on your crypto from various sources.

The interest rates you can get vary widely between different cryptocurrencies, different modes of lending, and different platforms. But to give you a rough idea, here are some ballpark figures for annual interest rates at the time of writing:

  • 5% on Bitcoin
  • 3% on Ethereum
  • 10% on stablecoins

The interest is usually paid out in the same denomination as the deposit. For example, a 5% interest rate on a 1 BTC deposit means 0.05 BTC in interest.

I’m going to discuss three sources of interest on crypto:

  • Credit platforms
  • Exchange lending
  • Native interest

How credit platforms work for the user

The main source of crypto interest I’m going to explain in this post are credit platforms. These include:

  • Crypto.com
  • Nexo
  • Celsius Network
  • BlockFi

As a user of one of these platforms, you deposit crypto into a custodial wallet (a wallet controlled by the platform) and earn interest.

Some platforms offer flexible terms where you can withdraw at any time. Other platforms give you the option to lock up your deposit for 1 month or 3 months to get a higher interest rate.

Some platforms have their own platform token. If you hold or stake (lock up for some time) a certain amount of this token, you get a higher interest rate on your deposit. You might additionally collect interest on your balance of the platform token.

Among the credit platforms I compare below, Crypto.com, Nexo, and Celsius Network report their rates as simple interest, while BlockFi reports compound interest. A compound interest rate appears higher than an equivalent offer stated as simple interest.

Crypto.com

At the time of writing, Crypto.com lets you earn interest on 24 cryptocurrencies, including 7 stablecoins. Crypto.com allows both flexible deposits and lock-ups of 1 or 3 months.

Without the platform token MCO staked, stablecoins earn 6–10% depending on lock-up, while most other cryptocurrencies earn 2–6%.

With a certain amount of MCO staked, most of these rates increase by 2 percentage points. With another, much larger amount of MCO staked, you get an additional 2 percentage points, this one paid out in MCO, on most fixed-term deposits.

Nexo

At the time of writing, Nexo lets you earn interest on 5 stablecoins and 3 fiat currencies. All deposits are flexible.

The interest rate is 8% on everything. The platform token NEXO doesn’t affect interest rates. Instead, NEXO holders get a dividend.

Celsius Network

At the time of writing, Celsius Network lets you earn interest on 23 cryptocurrencies, including 10 stablecoins. All deposits are flexible.

Interest rates vary by currency in a range between 1.51% and 7.25%. If you choose to receive your interest in the platform token CEL, these rates increase to a range between 2.05% and 9.90% if you hold a certain percentage of your deposits in CEL.

BlockFi

At the time of writing, BlockFi lets you earn interest on 6 cryptocurrencies, including 3 stablecoins. All deposits are flexible.

Stablecoins earn 8.6% of compound interest, other cryptocurrencies between 2% and 6%. Some of BlockFi’s interest rates are tiered, with the high rates limited to your first 5 BTC and first 500 ETH, respectively.

How credit platforms make money

Credit platforms have the following reasons to be in this business:

  • Loans
  • Customer acquisition
  • Platform tokens

Loans

Profiting off the interest rate difference between loans and deposits is most straightforward. For example, say the platform offers lenders 8% on their deposits while charging borrowers 12% on their credit. If the amounts lent and borrowed match up, the platform earns the spread of 4%.

The platform might offer loans to private individuals or institutions.

In all offers I have seen, individuals can only take out loans denominated in a stablecoin or fiat currency, and they have to deposit other crypto as collateral. The platform typically requires a loan-to-value ratio of 50%. For example, in order to take out a loan of $10,000 in a stablecoin, you have to deposit BTC worth $20,000.

The reasons why an individual would want to take out a loan instead of selling their crypto for cash are:

  • Selling their crypto might constitute a taxable event in their jurisdiction.
  • They expect the price of their crypto to increase and want to participate in the gains.

Institutions, on the other hand, can borrow any cryptocurrency. Such institutions include:

  • traders and investment funds
  • over-the-counter market makers
  • businesses that require an inventory of crypto to provide liquidity to clients

BlockFi has published a blog post that explains the motivations of these institutions.

Customer acquisition

Customer acquisition considerations can motivate a platform to increase its borrowing rates during its early existence. Where a traditional company might offer a one-time $100 coupon to get you to become its customer, the crypto credit platform can increase its interest rates for lenders such that it amounts to an extra $100 for a typical new customer. These introductory rates will probably decrease in the future.

Platform tokens

Finally, any mechanism involving a platform’s native token is designed to create demand for that token. The platform has created its native token out of thin air and typically still holds the vast majority of the supply. Creating demand increases the price that the token trades for and can thereby dramatically affect the balance sheet of a young platform.

Exchange lending

Credit platforms use your deposits to offer loans to traders, among others. Some exchanges give you the option to cut out the middleman and offer loans to traders directly. Such exchanges include:

These exchanges have marketplaces for loans. Interest rates on the markets fluctuate. They rise when many traders want to borrow a particular cryptocurrency. Traders borrow crypto in order to sell it on the exchange, betting that the price will decrease by the time they repay the loan, so that they can pocket the difference.

Individual loans on exchanges are usually paid back within days. With such frequent turnover, you’re better off automating the lending. To do so, you can use a service like Coinlend.

Note that Coinlend charges a fixed minimum fee in addition to a percentage on the interest earned. This means that using Coinlend only becomes interesting when you lend many thousands of dollars worth of crypto with it. I emailed them about it and their CEO replied that they needed the minimum fee in order to cover the cost of running the bot.

At the moment, I find direct exchange lending only interesting for cryptocurrencies that are not supported by credit platforms.

Native interest

Some cryptocurrencies allow you to earn interest directly. Examples include:

I have no first-hand experience with native interest.

Summary

10 years after the release of Bitcoin, offers started appearing to earn interest on a growing number of cryptocurrencies. Credit platforms are the most common way to do so. They lend your deposit to other individuals and institutions. You can also choose to lend directly to traders on exchanges. Some cryptocurrencies let you earn interest natively.