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Margin lending is a passive income source. Crypto is lent on exchange to margin traders. This activity is not risk free, it has a risks.
This risk in fact is why there is an interest payment. The interest is the reward for taking the risk!
It is important to understand all the risks of margin lending, knowing theses risks will allow to establish a minimum reward for all these risks.
There are four main risks
Human. These are vulnerabilities created because of human error, human greed or human intervention. They are hard to control because humans will always come up with innovative ways to make errors! As a human you are part of this risk set, knowing your strong and weak points will allow you to better understand the risks you pose to yourself.
- Not evaluating the risks of margin funding
- Not understanding how margin lending works.
- Making mistakes when transferring crypto
- Not taking backups of your crypto
- Exchange staff: Internal hacks
- Investing for a longer term than intended
- Regulators closing an exchange
- Regulators raising taxes on crypto
- Crypto Jacking
- Being too greedy
- Not tracking tax obligations
- Not understanding final profit due to unclear Fee structures of automated lending
- Your personal KYC data being stolen
- What are the tax implications, can your accountant handle this?
- Cyber criminals
Software. Software breakdown, it is part of the software development lifecycle. This is actually a human risk but it is so important that deserves its own category.
- Exchanges being hacked
- Lending bot being hacked and accessing the trading part of your exchange account (This has already happened)
Lending. The main lending risk is that the system that tracks the liquidity of a margin trader malfunctions or cannot keep up with a volatile market environment. This might happen, but to my knowledge it has not happened thus far.
- No Keys, No Coins. (If you do not own your private keys all you have is an IOU)
- Non recoverable defaults
- Failure of the liquidation mechanism
- Default of the exchange
- Non Segregated funds
Crypto / Market. There are two major risks here, regulatory and price risk. Regulators have not yet set out a firm agenda going forward in the crypto space. The price risk is that a margin loan of 1BTC worth 4k USD in January 2020 could be worth anything from 1k USD or 20k USD in December 2020.
- Underlying capital losing value
- Missed crypto forks
- Missed Airdrops
- Lending stable coins, which may break their peg
Unknown Risks. They are out there we just do not know what they are.
- What is passive income?
- Lending Cryptocurrencies for passive income.
- Margin Funding for crypto passive income.
Lending is risky, but judging by the lowe interest rates quoted many crypto investors are happy to take these risks. This does not mean that you should do so as well blindly. Passive income at all costs, including risking your underlying crypto capital does not make sense if the rates are too low.