Summary

This article reviews the lending markets of Bitcoin, Fiat currencies (Euro/USD), Ethereum and Litecoin on Bitfinex. It describes these lending markets as they have been for the past year and it describes some behavioral patterns with regards to loan duration and correlation with price changes. The article concludes with an outlook on the lending markets of 2018.

We analyzed the data to calibrate our algorithm and we decided to share our findings with our users so they could better understand the mechanics of the lending market. We decided to publicize it as well following positive commentary. It’s a relatively short read because we decided to only discuss the highlights of 2017 and some interesting behavioral patterns.

2017 Review

2.1 Bitcoin lending

The past year has seen considerable returns on bitcoin lending. The interest rate over the past year has fluctuated quite a bit between the ranges of 3.41% and 110.9%. The average lending rate for the entire year ends with 19.69%.

Exhibit 1: Average daily BTC interest rate for 2017 (bfxdata.com)

The high interest rate in the period of August was attributable to the chain split that led to the formation of Bitcoin Cash. Both on Bitfinex and Poloniex the interest rate on Bitcoin lending was high, although for different reasons.

On Bitfinex, users that loaned out their bitcoins received both Bitcoin Cash and Bitcoin in return. Borrowers speculated that the value of Bitcoin would drop after the fork, because the value of Bitcoin Cash no longer inherent in Bitcoin after the fork would be released. Thus, many on Bitfinex were short Bitcoin which caused for a steep increase in demand.

On Poloniex, users that loaned out their bitcoins only received Bitcoin in return, so their policy stated. The Bitcoin Cash was distributed to the borrowers, and therefore the interest rate on Poloniex was as high as 4.5% per day. Of course, this high interest rate was only temporarily, and borrowers would end these loans as soon as possible, after the fork was certain.

The total bitcoin lending market multiplied by 2.81 in 2017 in absolute terms (exhibit 2). When taking into account the 19x value increase of bitcoin in 2017, in real terms of value the bitcoin lending market has exploded by 53x in 2017.

Exhibit 2: Total sum of active BTC margin funding (bfxdata.com)

2.2 USD Lending

The average (not compounding) interest rate on USD was 30.86% for the year 2017, fluctuating between the ranges of 5.83% (26–04) and 123.66% (21–12). It’s been a good year to those who funded margin traders on Bitfinex.

Exhibit 3: Average daily USD interest rate for 2017 on Bitfinex (bfxdata.com)

Price drivers

The high interest rate on USD was caused by a heavy influx of new users who took long positions in bitcoin and other altcoins. Especially the recent hype in cryptocurrency trading (Dec ’17) has led to a demand in USD loans never seen before.

This increase in new demand can be seen in the total USD lending market: it has multiplied by 40x in 2017, totaling over 1 billion USD of concurrent active loans (exhibit 4). Fun fact: Bitfinex earns 15% of all interest earned, so on the 20th of December, Bitfinex earned more than 0.5 Million USD on funding commissions on USD alone. Congratulations Bitfinex!

Exhibit 4: Total sum of Active USD Margin funding (bfxdata.com)

Spiky pattern

Clearly visible in USD lending and BTC lending is a pattern whereby there is a sudden spike of the interest rate, followed by a gradual yield decrease in the following days or weeks. With the assumption that lenders have a certain risk assessment for margin funding per currency which should result in an equilibrium interest rate, this pattern may be caused by one or more of the following factors in demand and supply of margin lending:

Demand

Traders collectively take short positions on the borrowed cryptocurrency as a result of a sudden change in future price expectations. This causes a strong yield increase. Especially when certain altcoins suddenly spike in value, often a strong yield increase can be observed. See exhibit 8 further below for a clear representation of this.

Supply

Lenders require time to meet with market demand. The time that is required to allocate funds for margin lending causes that the high interest rate is not immediately neutralized as a result of an increase in supply.

Lenders’ risk assessment changes as a result of new information. The tether scandal that went viral at the 21st of November may have caused many withdrawals from Bitfinex because people lost trust in the solvency of Bitfinex.

Liquidity on the lending markets is low, so therefore the interest rate is highly volatile. It surely pays off to frequently analyze recent loans (duration / yield) to determine an optimal interest rate.

Loan duration

The average loan duration of USD loans that were placed was 17 hours. With such a short average loan duration and high yield, margin funding on Bitfinex can be considered as an effective method to deploy liquid assets on the short term. Exhibit 5 shows a cumulative distribution of USD loan durations of loans that were placed by us in Q3-Q4 2017.

Exhibit 5: Cumulative distribution of USD loan duration in days (marcopolobot.com)

More than 50% of the loans return within 0.3 days (7.2 hours), and more than 20% already return within 864 seconds (14.4 minutes). The average loan duration is 0.71 day (17 hours). Fortunately, lending bots (like us) exist to automate this otherwise tedious process.

2.3 Euro Lending

Newly introduced on the 21st of November in 2017 is Euro lending on Bitfinex. Loan rates in the past month have fluctuated between 5.5% (12–12) and 250% (18–12) with an average of 18.4% annually. Only EUR/BTC and EUR/IOTA trading pairs are currently available on Bitfinex, which possibly causes for (as of yet) the relatively low demand for Euro loans.

2.4 Altcoin lending

Ethereum

Ethereum lending isn’t as popular as bitcoin or USD lending and doesn’t yield as highly as dollars or bitcoins. The average annual lending rate for Ethereum was 10.52%, fluctuating between 0.2% and 61.39% annually. See exhibit 6 for an overview of Ethereum’s 2017 lending performance.

Exhibit 6: Average daily ETH interest rate for 2017 on Bitfinex (bfxdata.com)

Litecoin

The average annual interest rate for Litecoin was 14.59%, fluctuating between 0.36% and 165.63%. Exhibit 7 shows the interest rate for litecoin for 2017. Most of the times there is only a small demand for litecoin borrowing. It can only be used in the trading pairs LTC/USD and LTC/BTC on Bitfinex.

Exhibit 7: Average daily LTC interest rate for 2017 on Bitfinex (bfxdata.com)

As noted before, the yield spikes tend to occur when traders collectively take short positions on the borrowed currency. Compare exhibit 8 with exhibit 7 to see how the yield spikes occur in tandem with strong price increases of Litecoin. Apparently, traders speculate that a currency will drop in value (taking short positions) after it has gained strongly in value.

Exhibit 8: Litecoin price in USD & BTC (2017, CMC)

3. Future Outlook

The expected interest rates for 2018 are likely to be positively correlated with the popularity of cryptocurrency trading. The higher the trading volumes on a given exchange that offers margin lending and trading, the more demand there is for funding overall. If lenders fail to meet an increase in demand, the interest rate tends to rise upwards.

The popularity of cryptocurrency trading has recently risen strongly, and many new use cases are being developed. Cryptocurrency hedge funds appear everywhere. If the popularity and therewith trading volumes remain constant, 2017 might be a good predictor for the year 2018.

If you’d like to get involved in lending, check out our service to see how easy it is to get started. You can find us in the chat if you have any questions.

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Disclaimer: This is not investment advice and should therefore not be seen as such. Don’t lend out more than you can afford to lose. You may lose some or all of your funds. This article is meant to be purely informational. The writer of this article is affiliated with Marcopolobot.