Margin Lending Explained

With blendingbot, you can take full advantage of the margin lending market on Poloniex to earn interest on your cryptocurrencies. But what is margin lending?

Margin Trading

To understand margin lending, it's important to understand margin trading. Margin trading is when a trader borrows funds to purchase an asset. With Poloniex, margin traders borrow one cryptocurrency to buy another. They do this because they think the value of one cryptocurrency is going to go up relative to the other.

Traders can do this without borrowing funds but margin trading allows them to leverage their bets and make a greater return. When a margin trader closes her position, she pays back the loan plus interest and gets to keep whatever other profit she made.

For example, suppose Sally owns 1 BTC and thinks the value of BTC is going to go down relative to ETH. One option is for her to exchange her 1 BTC for it's equivalent value in ETH. If the value of ETH goes up 20% relative to BTC, she can exchange her ETH back to BTC, and she'll now have a total of 1.2 BTC. Alternatively, with her 1 BTC, she can borrow up to 1.5 BTC for a total of 2.5 BTC and exchange it for ETH. In this case, if the value of ETH goes up 20% and she exchanges her ETH back into BTC, she'll have a total of 3 BTC. After she pays back the loan and interest she'll have ~1.49 BTC (depending on the interest rate and how long she held the loan). That's much higher than the 1.2 BTC had she traded using only her funds.

Not all traders are that lucky though. Instead of going up 20% relative to BTC, maybe ETH goes down 20%. What happens then?

If Sally traded only her funds, her 1 BTC would become 0.8 BTC. If she instead bought the ETH on margin, she'd be left with ~0.49 BTC. This is because Sally still has to pay back the loan plus interest. So margin trading is risky but allows traders to make greater profits.

For further details, read Poloniex's page about margin trading

Margin Lending

The other side of margin trading is margin lending. Margin traders need someone to lend them coins. Poloniex allows you to offer loans to traders like Sally. If they're willing to pay your interest rate, they'll accept your loan. When the loan closes, you get your money back plus interest.

Anyone with cryptocurrencies held at Poloniex can create loan offers. Many offer loans manually but automating the process with Blendingbot is far more profitable. This is because market rates for loans can fluctuate dramatically, and borrowers can pay your loans back early. If you don't check your account multiple times a day, it's possible for your funds to be sitting idle not generating interest.

Blendingbot securely monitors your account to ensure your funds are always being lent out at a favorable rate.

Returns

APYs for cryptocurrencies fluctuate heavily and vary widely from currency to currency. Generally the highest APY's are available for bitcoin. We've seen APYs as high as 200%, although these rates are uncommon. In general, the expected return from bitcoin margin lending is higher than US equities and bonds.

What are the risks?

The biggest risk in margin lending is that the borrower cannot return the full amount of the loan because their position went down too far. In the example above, if ETH went down 50% relative to BTC, the value of Sally's position would be 1.25 BTC even though she borrowed 1.5 BTC. This would result in a loss to the lender. Poloniex has protections in place to prevent this from happening.

There's also the risk that Poloniex is hacked, has a bug in their platform or becomes otherwise insolvent. So a degree of trust in Poloniex is required.

We would advise against putting 100% of your cryptocurrency portfolio in any one exchange.

What are the protections?

Poloniex provides protections for your coins in case the margin trader's position starts losing money. Margin traders must own at least 40% of the loan's value in their margin account. Furthermore, Poloniex forces margin traders to liquidate a trade if the loan is at risk of not being paid in full. This will prevent you from losing any of the principal that was lent to the trader. In the example above, Poloniex would liquidate Sally's position before it fell by 50%. Although a flash crash is always possible, so there are no guarantees.

Learn more at Poloniex.