Can You Make Money Lending Crypto? A Comprehensive Guide to Crypto Yields and Earnings
Lending crypto isn’t just about parking your funds; it’s about putting them to work. By depositing your assets on a lending platform, you enable borrowers to access liquidity while earning an annual percentage yield (APY) or annual percentage rate (APR) in return.
But is lending crypto actually profitable? And how much yield can you realistically expect? In this article, we’ll break down the numbers and explore how this activity can turn idle assets into a potential source of passive income.
What is Crypto Lending?
Crypto lending refers to the process of depositing digital assets to a lending platform, which lends them to borrowers along with the funds of other lenders. In return you earn interest for providing much-needed extra capital to borrowers.
Putting your assets to work by lending them makes the most sense when you have idle coins and plan to hold onto them for long periods. You not only generate passive income but can further compound your returns by reinvesting the earned interest.
You can lend crypto either on centralised platforms that hold your funds in custody or via decentralised finance (DeFi) protocols that use smart contracts to offer you a trustless and non-custodial lending experience. While the latter option eliminates counterparty risks, a digital asset lending solution provided by a reputable provider like VALR can enhance your experience with more flexible terms and a full suite of cryptocurrency products.
How Does Crypto Lending Work?
On a lending platform, the typical lending process works as follows:
Deposit Crypto: To get started with crypto lending, you should first deposit funds to a lending platform or protocol. This can also be a digital asset exchange with lending services (e.g., VALR).
Lend Your Assets to Borrowers: The platform distributes your funds (along with other lenders') to borrowers to fulfil their borrowing requests. To access this extra capital, they must deposit collateral to the platform, which remains locked until the loan is completely repaid. On most lending solutions, loans are overcollateralised to protect your funds against borrower defaults. This prevents them from borrowing more from lenders than the total value of their collateral (e.g., with a 70% loan-to-value ratio, a borrower can only borrow $70 for every $100 of collateral).
Receive Interest Payments: Once you have deposited funds to the lending platform, you start earning interest on the cryptocurrencies you provided. Multiple factors determine your lending APY - ranging from the current supply and demand for the deposited digital asset on the service to lock-up periods, liquidity, and risk profiles.
Borrowers Repay Their Loans: Borrowers repay their loans at the end of fixed terms, including both the principal and the interest. Loans with flexible terms can be repaid at any time or until the value of the borrower's collateral falls below the pre-agreed loan-to-value (LTV) ratio. Once the latter occurs, the platform liquidates all or a part of the borrower's collateral to compensate lenders.
Withdraw Your Funds: Deposits to lending platforms without lock-up periods can be withdrawn at any time without restrictions. On the other hand, fixed-term loans will only unlock your assets once the mandatory lock-up period is over.
Can You Make Money Lending Crypto?
You can definitely make money by lending your crypto assets to borrowers. Lending platforms distribute earnings to lenders from the interest paid by borrowers. In most cases, borrowing rates are higher than lending APYs to ensure the long-term stability and financial sustainability of the service.
This earning method is considered a form of passive income, as it requires minimal effort from your side once your assets are deposited to the lending platform. Overall lending crypto offers an excellent way for long-term HODLers to put their coins to work and generate additional interest.
Factors Affecting Earnings Through Lending Crypto
How much you can make with crypto lending depends on multiple factors, including:
Asset: Lending APYs may vary by the supply and demand for a specific cryptocurrency among lenders and borrowers on the platform. For example, as of 7 January 2025, you can lend Bitcoin (BTC) with a 0.43% APR and Ethereum (ETH) with a 0.43% APR on VALR. In contrast, Tether USD (USDT) and USD Coin (USDC) offer a lending APR of 18% and 15% on the same platform, respectively. This indicates a higher demand for stablecoins than major digital assets among VALR's borrowers or a reduced supply of stablecoins among lenders (or both).
Platform: The interest you can earn as a lender can also vary between different lending platforms. While one may offer competitive rates, the supply and demand mechanics within others' ecosystems may force them to provide decreased APYs to lenders for the same coins.
Loan Term: Flexible loan terms come with no mandatory lock-up periods. However, if you commit yourself to a fixed loan term, you may be able to increase your crypto lending APY. In that case, you should be aware that you won't be able to withdraw your funds from the platform until the end of the lock-up period.
Liquidity: Market liquidity could also impact lending rates. If it is too high, you may face decreased lending rates on a platform. In contrast, very low levels of liquidity for a coin on a lending service could significantly boost the APYs you can earn as a lender.
How Much Can You Make Lending Crypto?
In the prior section, you learnt that you can indeed make money by lending crypto. We have also explored the factors that may influence the yield you earn as a lender. Now, the question is: how much you can make lending crypto?
The yield you can earn from crypto lending can be calculated by considering the following three variables:
Interest Rates: This is the APY or APR the lending platform offers you for depositing assets. It represents the interest you can earn per annum. Crypto lending rates typically range from 3% to 15% APY but can be higher for certain assets or services.
Lending Amount: This is the amount of crypto you deposit to a lending platform. The more digital assets you lend to borrowers, the higher your potential earnings will become. On most platforms, it is enough to simply deposit crypto to start earning yield.
Duration: Interest accumulates over time, so longer lending periods yield more returns. For instance, you will earn more revenue as a lender by lending the same cryptocurrency on the same platform for a year than only a month.
For example, if you lend 1,000 USDC at the current 15% APR on VALR, you could earn 150 USDC over a year. However, APRs tend to change with market conditions, and we have assumed that interest rates remained unchanged throughout the lending period for this example.
Currently, as VALR charges no fees for lending, you are free to withdraw, reinvest, or spend your earnings as a lender. You may still have to cover the costs of withdrawals, trades, and other transactions. Head to this page to learn more about VALR's fees.
What is the Yield of Crypto Lending?
Yield in crypto lending refers to the return on your investment (ROI) over a specific period, usually expressed as an Annual Percentage Yield (APY) or an Annual Percentage Rate (APR).
As explored earlier, your APY or APR can be influenced by factors like the platform, lending market supply and demand for a cryptocurrency, liquidity, and the loan term. Simultaneously, your earnings are determined by interest rates, the lending amount, and the duration.
Now, let's see what typical lending yields look like and how different platforms calculate interest rates for lenders.
Typical Crypto Lending Yields
Most platforms offer the following yields for crypto lending:
Stablecoins (e.g., USDT, USDC): 6% to 12% APY
Major Cryptocurrencies (e.g., BTC, ETH): 3% to 8% APY
Altcoins: Can vary widely, sometimes offering higher yields due to the increased risks posed to lenders
Understanding Lending APY and APR
In general, you can encounter two types of interest rate formulas for crypto lending, including:
Annual Percentage Rate (APR): Used primarily to determine borrowers' interest payments in the traditional finance industry, APR is a financial metric representing the annualised rate for loans. In the context of crypto lending, it determines the yearly interest you can earn as a lender on your deposited digital assets without considering compounding on the previously accrued compensation.
Annual Percentage Yield (APY): Unlike APR, APY calculates the annualised return for lenders while factoring in compounding interest. It accounts for the total potential earnings over a year, including any additional returns generated by reinvesting your interest.
Risks and Considerations of Crypto Lending
Crypto lending can offer you a convenient way to generate considerable passive income on your idle coins. However, it's essential to be aware of the risks associated with the activity:
Market Volatility: Cryptocurrencies are highly volatile, which may decrease your ROI or even cause losses if prices move in unfavorable directions as you lend your digital assets to borrowers. Extreme price swings could also make loans undercollateralised, increasing the risks of borrower defaults. As a lender, you can minimise your volatility-related risks by only depositing stablecoins to lending platforms.
Counterparty Risks: Lending crypto on custodial platforms comes with increased counterparty risks, as the service provider manages the funds you deposit on your behalf. In the case of platform insolvency, exit scams, or major security incidents, this could lead to a loss of funds. However, that doesn't mean you should completely avoid custodial platforms for crypto lending. Instead, you should choose a reputable service like VALR with licences in multiple jurisdictions and transparent security practices in place to protect your funds.
Smart Contract Risks: If you lend crypto on decentralised finance protocols, you should be aware of the risks of smart contracts these platforms utilise to facilitate lending and borrowing between users in a non-custodial and trustless way. Like counterparty risks, these vulnerabilities, bugs, and errors related to contracts can lead to a loss of funds for lenders. You can mitigate these risks by lending on a DeFi protocol that has been regularly audited by multiple prominent auditor firms.
Liquidity Risks: Some lending platforms may lock up your assets for a specific period, making them inaccessible until the end of the loan term. These fixed-term loans can reduce your liquidity and increase the potential impacts of market volatility on your coins. To prevent such scenarios, consider lending your crypto with flexible terms.
Regulatory Risks: The crypto regulatory scene is changing, with laws, rules, and policies varying greatly by jurisdiction. The changes to these frameworks can significantly impact cryptocurrency lending, so you should monitor industry news frequently to prepare for such developments.
Start Lending Crypto With VALR Today
Crypto lending presents a ludicrous opportunity to generate passive income on your idle digital assets. By understanding how it works and the potential yields, you can make informed decisions to maximise your earnings. However, it's crucial to assess the risks and choose a platform with an impeccable reputation to ensure your funds' safety.
Ready to take advantage of crypto lending? Register an account at VALR to securely lend your South African rands (ZAR), Bitcoin (BTC), Ethereum (ETH), USDC, USDT and other crypto assets and start earning interest.
Competitive Interest Rates: Enjoy attractive yields on a variety of cryptocurrencies.
Secure Platform: Benefit from robust security measures to protect your assets.
User-Friendly Interface: Easily manage your lending portfolio with our intuitive platform.
Don't miss out on the opportunity to grow your crypto holdings. Join VALR now and start earning today!
Risk Disclosure
Trading or investing in crypto assets is risky and may result in the loss of capital as the value may fluctuate. VALR (Pty) Ltd is a licensed financial services provider (FSP #53308).
Disclaimer: Views expressed in this article are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.
