Bitcoin Lending: A Complete Guide to Earning Yield on BTC

If you have bitcoin in your wallet that you aren’t planning to sell soon, lending is a great way to earn yield on your BTC. 

Thanks to the evolution of decentralized finance (DeFi), there are now multiple lending models for anyone who wants to maximize the earning potential of their BTC holdings.

Read on to learn more about lending bitcoin and how you can make passive income with bitcoin lending. 

What Is Bitcoin Lending?

Bitcoin lending refers to bitcoin holders lending their coins to borrowers for an agreed period of time and at an agreed interest rate, allowing lenders to earn yield on BTC and borrowers to gain bitcoin liquidity. 

Borrowers typically provide collateral and use direct P2P lending arrangements to initiate the loan. This reduces the risk for lenders if the borrower defaults.

The interest rates for bitcoin lending may vary, and they often depend on market factors such as supply, demand, and liquidity, as well as the lending platform you’re transacting on.

What Are the Different Types of Bitcoin Lending Platforms?

There are four major categories of bitcoin lending platforms. Let’s dive into each of them.

Centralized Bitcoin Lending

Acting as intermediaries between the two sides, centralized bitcoin lending platforms manage the lending and borrowing process. It includes users depositing BTC into the platform, which then lends the deposited funds to borrowers.

That said, despite the convenience, centralized lending involves custodial risk, as the platform takes hold of user funds and controls them. Also, interest rates may vary based on market conditions and platform policies.

Decentralized Bitcoin Lending

As for decentralized lending, smart contracts facilitate the lending process. These platforms typically use blockchain-based protocols to let lenders deposit their bitcoin into lending pools and earn yield through automated algorithms.

But despite their pros, decentralized BTC lending platforms may still pose security risks to potential smart contract vulnerabilities. Therefore, it’s wise to conduct due diligence and carefully research them before committing to a new platform.

Bitcoin Peer-to-Peer (P2P) Lending

A more straightforward method of lending your Bitcoin is taking advantage of P2P lending platforms, which act like a sort of lending match-makers, putting lenders directly in touch with borrowers. 

For instance, Liquidium provides a non-custodial, smart contract-powered, peer-to-peer lending platform that facilitates bitcoin lending. Such an approach boosts oversight and security while providing competitive bitcoin lending rates.

Institutional Bitcoin Lending

Finally, big market players (think hedge funds, market makers, and high-net-worth individuals) looking for a way to make use of large-scale BTC loans may dabble in what is called institutional Bitcoin lending, designed for their particular needs.

Such services traditionally involve over-the-counter (OTC) lending agreements, which provide liquidity for institutional traders.

How Does Bitcoin Lending Work? 

Although Bitcoin lending mechanics vary from platform to platform, the general rules of the game remain similar. For example, if you have BTC and want to earn yield, this is how the lending process takes place on Liquidium:

1. Choose a suitable collection: Visit Liquidium’s Lend page, pick an Ordinal collection (or Runes and BRC-20) you like, and click the ‘Lend’ button.

   

   
   
   

2. Set and confirm offer: Decide the amount of BTC you want to lend alongside the lending period (the days will depend on the specific Ordinal) and confirm. 

3. Pick your LTV: You can toggle between 0% and 100%, with the suggested LTV automatically set.

Pro tip: To increase the chance of your loan getting accepted, it’s recommended that you beat the current best offer. In other words, the higher LTV your offer, the higher it will be shown to borrowers.

4. Wait for the acceptance notification: Once a borrower picks your offer, you’ll get a notification in the app, as well as an email or a Telegram message, depending on your settings.
   
   

5. Approve the loan: Navigate to your Portfolio page, confirm the loan under ‘Pending,’ and sign in your wallet. The loan will begin once the transaction is confirmed in the mempool.

And that’s it! You can now start earning passive income from your Bitcoin.

You can cancel the offer anytime before the loan starts. However, you can no longer cancel it if it has already been initiated. Here’s how to do it:

1. Navigate to your portfolio: Open your Portfolio page, where all your active loan offers are listed.

2. Locate your offer: Look for the offer you wish to cancel under the section labeled ‘Loan Offers’ or ‘Pending Signature.’

3. Cancel the offer: Click on the ‘X’ button next to the offer.

4. Confirm: Approve the cancellation.

How to Use Liquidium’s Instant Loans Feature 

Now, you can also use Liquidium’s latest lending product: Instant Loans.

Instant Loans are much quicker than using the conventional lending process, as lenders deposit BTC into their vault and create instant offers, while borrowers get instant liquidity when accepting it. 

Here are a few quick steps on how you can start using it.

1. Switch to ‘Instant Loans’: First, as the feature is now available for Runes lending only, click on 'Borrow' or 'Lend’ in the top left corner of the Liquidium app, and choose 'Runes' in the menu above the token list. 

Next, click the upper-right button 'Manual' to switch to ‘Instant Loans.’

2. Confirm your choice: Then, you'll see a pop-up with loan options - accept 'Instant Loans.'

3. Follow the steps depending on whether you want to borrow or lend BTC: When borrowing against your Runes, the process will be shorter, as you'll just need to find your Rune in the list of available collateral, choose the best offer for you, and submit your request. 

Meanwhile, when lending your BTC against Runes, you'll need to take some quick steps, such as creating a vault, depositing your BTC, setting the BTC amount, which needs to be sent to the vault to start lending, and then just signing the transaction.

In either case, this whole process is going to be much quicker than using the 'Manual' mode while Instant Loans can also be sped up even further.

Pros & Cons of Bitcoin Lending 

Now, let’s take a look at the benefits and drawbacks of lending your bitcoin. 

Pros:

• Passive income from BTC holdings: Earn yield without selling your bitcoin.

• Access to liquidity without selling Bitcoin assets: Borrow BTC against Bitcoin Assets while maintaining exposure to price appreciation.

• Decentralized lending mitigates counterparty risk: You rely on the smart contract of the decentralized platforms. 

Cons:

• Smart contract risks in DeFi lending: Vulnerabilities in blockchain protocols could lead to loss of funds.

• Market volatility affecting collateralized loans: Sudden and deep price drops may set off liquidation.

• Platform trustworthiness (custodial risk): Centralized platforms require users to trust third-party custody.

Get the Best Bitcoin Lending Rates on Liquidium

Liquidium is arguably the best bitcoin lending platform since it offers highly competitive lending rates (up to 380% APY) and provides you with full control over your funds through our non-custodial, P2P lending model. 

Connect your wallet to Liquidium to start borrowing and lending bitcoin. 

Disclaimer: This article does not constitute financial advice, and we strongly recommend conducting your own research and consulting with a professional financial advisor before making any investment decisions. We are not liable for any potential losses incurred from applying the strategies discussed. Proceed with caution and at your own risk.

FAQs

How can you make passive income with Bitcoin lending?

By lending bitcoin through platforms like Liquidium, you can put your bitcoin to work and start earning passive income–in the form of interest payments–on your BTC. 

How much yield you will get on your bitcoin will depend on the lending platform, market conditions, and your agreed loan terms. But lending bitcoin has become one of the most popular ways to earn investment income in the crypto market. 

How much can you make by lending Bitcoin?

Earnings from lending bitcoin vary from one platform to another and depend on the rates, loan demand, and lending terms. Liquidium’s approach guarantees competitive interest rates for lending BTC using Ordinals, Runes, and BRC-20 as collateral, allowing you to earn up to 380% APY.

What are the best Bitcoin lending sites?

With its non-custodial P2P lending system, user-friendly interface, and highly attractive lending rates (of up to 380%), Liquidium stands out as one of the best bitcoin lending sites in the market. By leveraging Liquidium’s advanced lending protocol, bitcoin holders can earn DeFi lending income in a safe, transparent, and efficient way.