As the digital currency financial system develops, a new type of investment is emerging: margin lending. Currency exchanges have created platforms for their users to take out margin loans in order to make leveraged currency trades and the margin funding itself is also provided by users. This goes against the traditional system of brokers providing margin. This development makes sense because it takes the exchanges out of the credit side of the transaction, and focuses their role on maintaining a market and processing transactions. The exchange still needs to work on providing users with a margin exchange that promotes liquidity by offering participants a fair marketplace. The relative success of each exchange will depend on the rules accompanying their own system.
The table below shows the simple APR for various margin lending platforms for various currencies. The way I calculated the rates in the table was to take the midpoint of the bid/ask in the current market at the time of writing then multiply this midpoint price by 365 to arrive at an annual rate. I understand this calculation doesn’t take into consideration such factors as compounding, but the table below still gives us an idea of relative rates of return.
| USD | BTC | ETH | |
| Bitfinex | 17.53% | 1.57% | 7.14% |
| Poloniex | N/A | 6.28% | 1.99% |
| OKCoin | 31.02% | 27.37% | N/A |
| BitVC | N/A | 0.37% | N/A |
The first thing I noticed from this table is the widely divergent rates between each platform and between currencies. Each of the markets listed in the table provides bitcoin margin lending markets and the rates that can be obtained from each site are widely different. The rate on Bitfinex for BTC is so low as to compare with the rates offered by regulated banks in the fiat economies of North America, whereas the rate for BTC at OKCoin is at a massive 27.37%.
The best rate for both USD & BTC can be found at OKCoin, and OKCoin also offers CNY margin lending markets as well. So let’s look at the mechanics, liquidity, and rules of OKCoin in particular to see why this might be the case. OKCoin is based in mainland China and does not allow US based customers. This might partially explain the high rates for USD as there might be a lack of supply for these types of margin loans, but not the high rates for BTC. The mechanics at OKCoin for the margin lending market are pretty straight forward, with an open market of bids and offers and an auto-renew feature. The exchange states the margin rules call for forced liquidation in the event a trader’s margin falls below 10%. Without much experience on this platform or data at my fingertips, its impossible for me to say whether the risk of default is large. Judging by the high rates at OKCoin, default sounds like a real possibility. The exchange offers a service called “insurance” which costs 10% of the value of the interest earned. Whether this is a good or bad deal, or the details of coverage don’t seem to be disclosed. The fact that insurance costs a nice round number like 10% makes me think the exchange is up-selling coke & fries with margin orders.
Bitfinex is the largest crypto currency exchange and provides the platform with the most usability and an ecosystem of data from BFXData that publishes useful information from the exchange. Although Poloniex trades the most currency pairs and also has the most currencies listed for margin lending, Bitfinex is the most liquid and the market at Bitfinex is currently offering higher rates on Ether.
I wonder how these markets will develop? In terms of regulation, these exchanges will be in a constant negotiation/battle with regulators, particularly in the US & China. It might be beneficial to be located in a 3rd party country in order to fly under the radar of the shifting regulatory landscape. Another factor to keep in mind as these platforms develop is liquidity. A lack of liquidity might be a bad thing in terms of getting orders filled and keeping money invested, but a lack of liquidity could also offer opportunities for higher rates (being compensated for the lack of liquidity) and also arbitrage and hedging between platforms. I think as more margin lending groups start using APIs to move faster between platoforms, the rates of returns between platforms should converge. But maybe not, if the margin rules between exchanges are different, those different rules will mean different risks, which means different rates.
