Poloniex is a USA based cryptocurrency exchange, which lists a wide range of altcoins pairs for trade. Its 24 hours trading volume reaches to $21 million (33k BTC), which has high liquidity and is one of the top cryptocurrency exchanges. It implements high security measures to ensure the safety of the fund, like two factor authorization, email or telephone verification. Most of funds are kept in cold storage. Besides exchange feature, it offers margin trading and lending as well.
What is margin lending
It is to lend out unused bitcoins to the margin traders and get you bitcoins generating incomes. Their margin balance in Poloniex must be kept 40% of bitcoins as collateral in case of the enforced liquidation. It is far safe way of earning some extra money, comparing with margin trade. The current interest rate is about 0.02% daily, which varies a lot, especially at the time of strong market uptrend or downtrend movement, the interest rate could be pushed higher to 1% – 2%. So we can easily earn interest more than 10% annually. But Poloniex charges 15% fees from the interest earning by the time the loans are returned. Check here , you will get the general ideas how to do it.
You must transfer balance to margin account from exchange account by clicking the TRANSFER BALANCE at the dropdown menu of BALANCE of the top right corner. The BTC lending page will show up by clicking the LENDING at the top. Poloniex gives you an opportunity of lending a variety of coins, like BTC, BTS, CLAM, DOGE, DASH, LTC, MAID, STR, SMR, XRP, ETH, FCT. It is like trading the loan. We can see two columns LOAN OFFERS and LOAN DEMANDS, which is showing the interest rate.
Our money can be instantly loaned out at current market interest rate ( the first one of the LOAN DEMANDS column ) Or we can specify the desired interest rate, which could be higher than current one and showing at the LOAN OFFERS column, and wait for margin traders to take it. The higher the interest rate is specified, the longer we have to wait for the loan to be taken. We should know that the loan is staying at the offering list and wouldn’t generate any incomes. To increase the chance of lending out your money, you should set appropriate interest rate.
Auto-renew feature should be carefully used, which will automatically offer your loan again at the previous rate after the repayment date arrives, or the loan is returned early. The borrowers can renew the loan again after the deadline. You should closely watch your loan if the auto-renew is activated. In case the interest rate is jumping up, the low interest rate doesn’t make sense any more. So the Auto-renew should be turned off. After the loan is returned , you could set the new interest rate and offer the loan at the new higher interest rate again.
The interest rates could drop down. The borrower will tend to return the loan early and borrow the lower interest loan. And your coin will stay idle on the loan offer list. We need to offer the loan at a lower rate again.
The minimum length of the long is 2 days, could be extended up to 60 days. Most lenders would choose 2 days. By the time the loan is returned, they could adjust his interest rate corresponding with the market, which is fluctuating second by second. Therefor lenders are able to catch on the higher interest rate and earn as much as they could from lending. But the lenders have to watch his lending account as much as he can in case missing the opportunity.
1.Exchange rate risk
The exchange rate of coins to fiat are fluctuating a lot. In the time of unexpected price crashing, lenders wouldn’t be able to get back the loans to cash out for fiat to preserve the value in term of fiat until being returned by borrowers.
2.Delayed margin call
Margin traders can borrow up to 2.5 times of margin balance, which means 40% of collateral must be kept in there. If borrowers lose more than that amount of collateral (all of margin balance), margin call will be triggered automatically and the position will be closed, which is to mitigate the risk of further loss, protect the investors’ money and get the loan returned. But in some extreme cases the market are insane and the price movement are too fast for the system to have an opportunity to trigger margin calls in time. So the borrowers will suffer far more loss than his margin balance. Beyond the interest loss for lenders, they will lose corresponding amount of principal as well.
Although Poloniex implements high security mechanism to eliminate the chance of losing our money, and built a solid reputation in crytopcurrency community, but it is still the third party holding our funds, exchanges hacks and inside scandals news are all over the internet. We don’t know how strong Poloniex will be keeping. There are still some risk of been compromised in any time.