How Does Bitfinex Funding Work?

If you have spare bitcoins kicking around, one way to use them is by lending them out to margin traders on an exchange such as Bitfinex. This post will explain how the Bitfinex funding market works, and how you can use it to earn more bitcoins (and even US dollar tether).

Bitfinex is a cryptocurrency exchange. Users can signup to Bitfinex to trade cryptocurrencies such as bitcoins, ethereum, bitcoin cash, and many others. One of the unique features of Bitfinex is their margin funding markets. For users who want to add leverage to their positions and users who want to earn interest on their bitcoins, Bitfinex offers a margin funding order book where those users can exchange margin funding with each other. So if you’re a trader with a bullish view on ETH over BTC, you can actually borrow BTC on Bitfinex and use those borrowed funds to jack up your ETHBTC position. This funding isn’t free, so users can also choose to lend those BTC and earn a daily interest rate.  The user funding market is an ingenious feature offered by Bitfinex which is one of the main reasons the exchange has attracted so much volume. Whereas a typical margin loan is made by a broker or dealer, as the exchange Bitfinex cuts out these middleman (as they remain as the middleman themselves).

What kinds of rates can lenders expect to receive? Since Bitfinex runs an open order book for funding, the rate you will receive is simply result of of supply and demand, and so the rate you will receive will fluctuate as the market dictates. Rates are quoted as percent per day. To find the simply daily annualized rate, multiply by 365 or use your own formula to find an APR. Follow this link to BFXdata where you can view historical Bitfinex funding rates. You will see that bitcoin funding mostly range from 0.01% per day and sometimes spike up to 0.60% per day.

What are the risks? Other than interest rate risk, and the risk that their bitcoins fall against your own unit of account (your home fiat currency?), the main risks that Bitfinex lenders face is the default risk of borrowers and the credit risk of Bitfinex itself. The risk that borrowers default is actually very low, in fact its so low that you will probably never have a borrow default on a loan. Why?  Because of the Bitfinex margin limits. Follow this link for a description of the margin rules. Bitfinex borrowers receive a margin call when the net value of their account equity reaches 22.5%. When the net value of their account falls below 15% of your borrowed funding value, the position will be force-liquidated.  Since Bitfinex is a very liquid exchange, and since there are so many ways to arbitrage the bitcoin price, the exchange can virtually always liquidate positions to make the lender whole.

The credit risk of Bitfinex is the main risk for lenders. Even though the risk of any individual defaulting is very low (virtually non-existent), the main risk is Bitfinex itself goes bust or gets hacked, and this is not pie in the sky, its happened before and it could happen again. I personally think the risk of Bitfinex being hacked again in a major way is low, the rate of return users can earn by funding margin loans reflects this risk.  Bitfinex funding does not earn you free money. I hope eventually clearing houses (maybe blockchain based clearinghouses?) will emerge to reduce the exchange default risk.

So, you want to earn some bitcoin interest by lending your funds out on Bitfinex? After you open an account, you deposit your bitcoins, and move them to your funding wallet. Now you can place an order to lend out your coins using similar mechanics to trading stocks and cryptos. There is an order book with bids and offers, choose your strategy and work your lending book. You can use the Bitfinex Flash Return Rate (FRR) which is kinda like the average daily rate on funding to automatically renew your loans, or you can auto renew at a fixed price, or you can manually update your loans using your fingers or the Bitfinex API.

Bitfinex also charges fees on margin funding. At the time of writing fees are 15% of the interest you earn.

If you have questions about Bitfinex lending, please post your comments below and I’ll do my best to answer specific questions.