As with all investments, you buy cryptocurrencies hoping for their prices to rise and to sell the coins for a profit. But some cryptocurrency exchanges in India also allow you to lend them. Vauld and ZebPay are two such cryptocurrency exchanges.
How does crypto lending work?
On Vauld and ZebPay exchanges, you can lend (i.e., deposit) Bitcoin (BTC), Ethereum (ETH), Tether (USDT), Dai (DAI), etc.
ZebPay allows you to lend for 7 to 90 days. The rate of return will vary depending on the term you opt for. For instance, you can generate annual returns of up to 3 percent on Bitcoin, up to 7 percent on Ethereum and Dai, and up to 12 percent on Tether. It allows you to lend in six variants of cryptocurrencies.
“This lending feature is targeted at HODLers (long-term crypto investors), as it allows them to earn a passive income apart from the gains of any rise in crypto prices,” says Avinash Shekhar, Co-CEO of ZebPay, crypto-asset exchange.
Vauld allows you to lend cryptocurrencies for 30 to 90 days. You can generate annual returns of up to 6.7 percent on Bitcoin and Ethereum, upto 12.68 percent on DAI and Tether. It allows you to lend in 30 variants of cryptocurrencies and earn interest on them.
However, to earn interest by lending, it’s mandatory to transfer the cryptocurrency to the exchange wallet. You cannot link external wallets such as MetaMask and Trust with the exchanges.
Upon maturity, the returns earned will be deposited in your trading wallet along with the principal amount.
For instance, if you lend a Bitcoin for three months on the ZebPay exchange, your wallet will be credited with an interest in bitcoin cryptocurrency, along with the principal by the time the loan term ends.
You can withdraw this cryptocurrency any time before maturity. However, a penalty may be levied on the returns in the future. “We have waived penalties for the time being as it’s a new feature on our platform,” says Shekhar from ZebPay. On Vauld there are no fees or penalties for opting out before maturity.
Investors get an opportunity to earn passive returns. “It grows the investments further, by making existing crypto holdings do all the work of appreciation,” says Shekhar. These returns are on top of those gains made from a rise in crypto prices.
“With this new feature, it seems like an evolution of the shadow banking system. Long-term investors in crypto may find value in it,” says Rishabh Parakh, the founder of NRP Capitals.
What doesn’t work
The major risk is the possibility of your crypto exchange being hacked. “The likelihood of exchanges getting hacked and losing all of their funds are less because of the enhanced security measures that they have started using now,” says Naimish Sanghvi, founder of Coin Crunch India.
“ZebPay is focused on ensuring the security of customer deposits and wallet holdings. So, most of the coins on the exchange are stored in cold wallets which are not available online. This minimizes the risk in case of a hack,” says Shekhar. “We also have funds insured using international industry standards to minimize the risks in case of any security breaches,” he adds.
“Another risk of keeping cryptocurrency in any exchange wallet is the exchange going bust,” says Parakh. In the past, there have been such instances and investors have lost in the crypto investments.
There is a lock-in to earn interest income on cryptocurrencies by lending to exchanges. In case prices fall and you want to exit, you need to intimate the exchange in advance to withdraw pre-maturely. “So, there is a risk of price depreciation when you lend with a lock-in feature,” says Vikram Subburaj, CEO and Co-founder of Giottus Cryptocurrency Exchange. Also, there will be a penalty introduced if you exit in the middle of the term.
Parakh says, “As there is no regulator body to monitor the lending feature of the exchange, there is no guarantee on the interest income.” Also, there is a risk of this feature being discontinued by exchanges in case of any regulatory interference during your term of lending.
Should you lend?
This lending feature offered by exchanges is incentivizing investors to keep cryptocurrencies in exchange wallets. “But, compared to decentralized finance (DeFi) the interest rates are less and so is the complexity, as it only needs a couple of clicks to start earning interest on the exchanges,” says Sanghvi. He adds that there is a scope for exchanges to add multiple cryptocurrencies rather than limiting themselves to the top market-cap ones.
The earnings are highly volatile in crypto, so you may not able to exit due to lock-in.
“Lend only the amount that you can afford to lose,” says Parakh. However, Moneycontrol recommends avoiding lending your cryptocurrency coins. It’s far too risky to lend.