Some Crypto Owners Are Earning 25% Interest by Lending Out Coins

Want to earn passive income while you hold coins? Crypto lending is an option.

If you're a crypto investor, crypto lending can provide you with immediate returns -- and you don't even have to sell any coins. At the time of writing, cryptocurrency exchange KuCoin is offering annual percentage rates (APYs) of over 25% if you're willing to lend out your crypto.

Is it too good to be true? The best high-yield savings accounts pay significantly less interest, and crypto lending is certainly a riskier way to hold your savings. When it comes to crypto, returns are not guaranteed. Here's what you need to know.

Find the right exchange

Not all cryptocurrency exchanges let you lend out your crypto. Each exchange is different, and interest rates can vary greatly depending on the type of loan or the coin you loan out.

Exchanges offer two main types of loans: fixed and flexible.

• Fixed. Think of fixed lending like a bank CD. It locks in your deposit at a predetermined rate for a set period of time, typically seven to 90 days. The reward for not touching your crypto is it pays higher interest.
• Flexible. Flexible lending is more like a savings account. You can withdraw your crypto at any time, but the return rates are lower.

For example, Gemini Earn is a flexible lending provider. It pays a daily APR, so you can earn compound interest on your coins. The platform partners with accredited third-party borrowers, and you can redeem your coins at any time.

Binance, the largest crypto exchange by volume, offers several investment products internationally through Binance Earn, for both fixed and flexible lending. Unfortunately, this is not currently available in the U.S.

Then there are exchanges like KuCoin that provide a marketplace for peer-to-peer (P2P) lending. Users can either set their own fixed lending rates or lend at the current market rate.

With any exchange, it’s important to know your funds are safe and secure. Not all exchanges follow the same compliance guidelines set by U.S. regulators -- key among them the Know Your Customer (KYC) rules that verify customers’ identities and curtail criminal activity. U.S.-based customers may risk getting their accounts shut down on exchanges that do not comply with KYC rules.

Choose your coins wisely

Although there are over 9,000 cryptocurrencies, according to CoinMarketCap, most exchanges only allow users to lend a few dozen of them. So the question is: Which coins should you lend? That depends on your desired returns, market conditions, and personal risk tolerance.

There are two main crypto lending strategies to consider. You can earn interest on stablecoins or cryptos like Bitcoin that you plan to hold. Stablecoins, like USD Coin (USDC) and Tether (USDT), aim to peg their value on a one to one basis to U.S. dollars -- hence the name. Regardless of market volatility, the price of stablecoins remains unchanged, making them a lower-risk option. But not all stablecoins are backed by the same reserve assets, which raises the question of just how stable they really are.

Bitcoin and altcoins are highly volatile. As such, the amount you earn in interest may be unpredictable. Lending them out may appeal to investors who want to hold their coins and still get paid. But it also means any changes in the price of the crypto will affect their income. Investors who use fixed lending services should be prepared for sudden changes in value, as they won’t be able to trade coins that are tied up for set periods of time.

Which coins pay the most interest? Stablecoins currently offer the highest interest rates, between 5% and 25% on most exchanges. Rates for Bitcoin and Ethereum are lower at around 1% to 3% APR. Why is this? When the crypto market is bullish, there's a stronger demand for stablecoins from investors who plan to go long. The opposite is generally true in a bearish market, when investors look to borrow crypto to go short.

Risks and fees

In crypto land, returns are not guaranteed. Most crypto exchanges don't have the same protections as traditional FDIC-insured bank accounts. FDIC insurance covers consumers against losses of up to $250,000 if the bank fails or funds are stolen. Some exchanges, like Gemini, vet their borrowers through a stringent risk management process. Others, like KuCoin, do not. However, KuCoin does claim lenders can always get full repayment through its insurance fund if borrowers default.

With high returns come high risks -- exchanges can and have failed. Coins have pumped and dumped. As with any investment, it's not a good idea to risk money you may need in the short term that you can’t afford to lose.

Then there are fees, which can add up quickly. Most exchanges charge a fee to buy crypto, a fee to sell crypto, and a fee to withdraw crypto. And there are blockchain fees you may have to pay to make transfers from wallets and exchanges. If you're not careful, fees can take a serious bite out of your earnings and put you in the red before you even start lending. With this in mind, it's best to map out a lending timeframe. That way you can calculate whether the interest you might earn will cover any fees.

Crypto lending can offer eye-popping interest rates, allowing investors to earn passive income on their coins. But make sure you can stomach the risks.