An introduction to Margin Lending – a less risky version of Peer-to-Peer Lending?

Over the last few years, we have witnessed the rise of various peer-to-peer lending platforms. Their core idea is to facilitate loans between people directly, thereby cutting out the middlemen, namely banks with their fees, limitations, and often slow procedures. The promise of those platforms for investors is to offer uncorrelated streams of return in case they are willing to bear the risk of lending to unknown strangers via the internet.

As appealing as the core idea of P2P lending might seem, they have not always been able to fulfill their expectations: Credit default rates have often been higher than expected, there have been fraudulent borrowers and even platforms, who have ran away with the money.

Introducing Margin Lending

Margin lending picture 1Interestingly, there is a less famous version of P2P lending that avoids many of the above mentioned risks – namely credit default risk – that has been growing steadily in the last few years: Margin lending. Its core idea is based on an age-old mechanism that is known from traditional financial markets, i.e. leveraged trading. Leveraged trading is an activity where traders only contribute a certain part of their positions in equity and borrow an additional amount in order to buy a certain asset. In traditional markets, it is usually a middleman, either a stock broker or a bank, who provides external capital and receives interest payments in return. Of course, you can apply the core idea of P2P lending, i.e. cutting out the middleman, to this situation as well. That’s exactly what is meant by ‘margin lending’. The word derives from the notion of ‘trading on margin’ where margin describes the security buffer or equity portion in a traders account against which they can borrow external capital to engage in leveraged trading. Margin lending then just means the provision of capital to such margin accounts in return for interest payments.

But you would need financial markets without banks or brokers, right? That’s correct – and you can find those on crypto exchanges. Many of the exchanges where you can buy and sell crypto currencies haven’t had the capital in the beginning in order to provide margin lending by themselves, so they opened it up for external capital providers, like you and me.

The risks of Margin Lending

Margin lending picture 2So, what are the benefits of this and how exactly does it work? To judge any investment opportunity, you should look both at its risk and its return characteristics.

Let’s start with the risks. The core risk in any lending investment is credit default risk which means that a borrower wouldn’t be able to pay back the loan, either partially or fully. The main advantage of margin lending on crypto exchanges is that this risk is almost fully eliminated due to the technical setup of the transaction: Every time a trader takes on a loan – which are mostly short-term loans (0-2 days) that are automatically assigned via the exchange’s own margin lending markets – the trader is bound to use the loan for trading on the platform, i.e. they cannot use the capital for anything else and cannot withdraw the money. This rules out all types of dedicated fraudulent activities where borrowers would “take the money and run”.

Secondly, if a trader then uses the borrowed capital to invest in a crypto position (e.g. Bitcoin, Ethereum etc.) in combination with their own equity, the borrowed capital is protected by the following ‘margin protection’ mechanism: Should the position of the trader run against them, there would be an early liquidation mechanism which would exchange the crypto position back into USD cash and return the borrowed capital to the lender, incl. interest rates. The trader would still lose a part of their equity portion in the trade, but the borrowed capital of the lender is systematically protected by this automated and forced liquidation.

An example of Margin Lending

Say a trader deposits 1000 USD of their own capital on a crypto exchange. In order to leverage his position, they would then trade via their margin account and automatically borrow another 1000 USD from us as a lender (this only works if we have put in an order with at least 1000 USD on the other side, so to speak). Now, the trader would be able to open a leveraged position in BTC or any other of the large crypto assets with a dollar value of 2000. What happens if the position decreases in value? In case of a losing position, it is only the equity of the trader that is lost, not the capital he has borrowed from us. How does this work? In the example above, the price of BTC could drop for as much as 50% before the trader would lose the ability to pay us back. They would then be left with nothing. In reality, the exchange has implemented an automated liquidation system that would trigger a forced sell of BTC in exchange for USD when the price did only drop for as much as -15%. In this case, the trader would have lost 300 USD (0.15*1000 USD) and our capital plus interest would be returned to us. Since crypto markets are open 24/7 this forced liquidation mechanism works very reliably. One could argue that this is actually the most innovative part about the whole investing opportunity.

Margin lending picture 3How does it look on the return side then? What can investors reliably earn by investing in margin lending? The returns go back to the daily rates that traders are willing to pay for their borrowed capital and the capital supply that you can find on those platforms. Since the capital supply is rather stable we can focus on the capital demand. Due to short-term profit expectations from traders and the more speculative outlook that most traders have who engage in crypto trading, their willingness to pay interest rates is usually very high. The interest rates for external capital are measured in daily rates and those rates typically range from 3 to 10 basis points (i.e. 0.03%-0.1% per day). If you extrapolate and add a compounding effect, you can see that you can easily pocket an annualized return of somewhere between 10%-30% per annum.

Introducing Lendary – The future of high-yield lending

Of course, in order to truly achieve those returns, it is recommended to use a software service that automates and optimizes the lending activity 24/7. One of the leading services in that domain is Lendary, which is particularly focused on investors who are not interested in crypto markets as such but who are just looking for an uncorrelated form of high-yield lending. This includes a full setup guide and personal support in setting up the relevant accounts. What the software itself does is continuously monitoring the investor’s exchange account and issuing new lending orders to the best possible rates in case any capital is returned back from traders positions. Additional features such as “rate-booster” functionality for longer lending periods in case of abnormally high rates or downloading of tax relevant documents complement the offer. The service is also free of any fixed fees and is just charging a 20% performance fee based on the net interest that is actually generated. As a result, Lendary works like a high-yield fixed income product with almost zero default risk, double-digit returns, and daily liquidity. Performance

How does Lendary work?

Capital providers can create their own account on selected crypto exchanges. After depositing USD into their account, they can accept to provide their capital on a short-term basis (2-30 days) to traders on the same exchange. This also means that capital providers will not have any crypto exposure, since they will just hold USD. We have created a software that optimizes this process by deploying available capital at the best possible rates on a 24/7 basis.

Lendary how it works visual

Less risk – Traders can only use your capital for opening crypto positions. Those are monitored and can be force liquidated around the clock (24/7). This eliminates traditional credit default risk while still earning constant returns.

More control – Unlike some P2P-lending plattforms, we don’t get hold of your money at any time – we simply provide the software that lets you optimize the lending process and thus getting you the best possible interest rates.

If you register through my referral link you will receive a bonus of 3% lower Lendary fee for the first 6 months! Click here to register.

This bonus can be found only here, you will not get this bonus if you sign up directly on Lendary.Net.

This article was created with collaboration between Lendary and blog


Frank Steffen

Frank Steffen, the CEO and co-founder of Frank is an entrepreneur by heart. He believes in the progress that humans can make by building new products and services to create value for others and for the companies that are created on the way. Frank started his career in two technology ventures before joining the Boston Consulting Group as a strategy consultant, mainly working on projects around digitization. After that, he branched out to founding a prop trading company and a Fintech for alternative fixed income ( In addition, he is actively training companies and NGOs in design thinking and agile product development. Frank Steffen holds an M.A. in Philosophy as well as an M.Sc. in Innovation, Entrepreneurship, and Management from Imperial College, London. Frank Steffen LinkedIn -

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