Update 12Nov2022: FTX has filed for bankruptcy yesterday. I have lost all my remaining funds on FTX.
Update 8Nov2022: With the bank run going on with FTX, I have withdrawn most of my funds from FTX. If FTX survives this crisis, I will put my funds back.
One of my favourite features about FTX is lending out my crypto holdings for passive income. I use it so often that I even wrote my own software to monitor the lending rates on the FTX platform. I will share it with the public free of charge.
This is not a sponsored article. FTX does not pay me a single cent to promote their lending feature. I am writing this as a happy FTX customer.
Here is the website I developed which displays the latest FTX lending rates for all the lendable tokens/coins listed on FTX.
This is a sample of the highest lending rates for the top 20 coins/tokens listed on FTX. Since the lending rate fluctuates by the hour, the average lending rate ranging from the past 12 hours to 50 days is shown.
The interest rates look alarmingly high. Several are even yielding double-digit interest rates! One high-risk token(CEL from the bankrupt Celsius) yielded even more than 300% for the past 50 days on 22 Aug 2022.
Is this another Ponzi scheme that is going to eventually blow up like Anchor? The immediate question that comes to mind is "Is lending on FTX safe enough"?
Note that I did not ask the question "Is it safe?". I asked, "Is it safe enough?"
In today's crypto winter, nothing is safe in the crypto world. However, being a crypto investor, one cannot take zero risk and not invest at all. So, the right question to ask is whether it is safe enough to put in a meaningful amount.
After doing due diligence, I concluded that lending on FTX is safe enough to risk some of my own funds. Only some. Most of my investments are still in traditional stocks and bonds which are highly regulated.
I wrote this article from the perspective of a lender, not borrower. I am primarily concerned about the risk as a lender.
When a customer lends out on FTX, he is lending his crypto tokens/coins to other customers. FTX acts as a middleman in providing the infrastructure for lending/borrowing to take place between customers. FTX charges a taker fee to the borrowers. FTX charges no fees to lenders.
The risk to the lender is much reduced because FTX stands as a guarantor if the borrower gets liquidated.
During this crypto winter, FTX has a few billion to buy up troubled crypto firms on the cheap. If FTX has the financial power to "bail out" crypto companies, then it is likely to be in a strong financial position itself. Having a financially strong guarantor for my loans is an added assurance.
Since FTX is a guarantor, it makes sense for a customer to lend his crypto tokens/coins for interest income. As long as the coins are on the exchange, the credit risk is the same even if he chooses not to lend them out. Furthermore, the loan duration is only one hour.
As a general rule, the shorter the loan duration, the lower the risk to the lender because the probability of a bad event happening within a short period is lower compared to a longer period. The loan duration on FTX is only 1 hour. The lending rate fluctuates by the hour.
With the collapse of several crypto lending companies such as Celsius, BlockFi and Hodlnaut in 2022, investors have a bad impression on the business of crypto lending. I myself have come to the conclusion that the crypto lending business model of Celsius and Hodlnaut is flawed. So, how is FTX lending different from these crypto lenders?
The nature of FTX lending is different from the lending activities of failed crypto lending companies like Celsius, BlockFi, Hodlnaut in one critical aspect -> No liquidity mismatch. An example of liquidity mismatch means a lender, say a bank or crypto lender, lends out his funds for 1 year but depositors can ask to withdraw the funds at any time. So, if too many depositors request to withdraw at a time when a substantial portion of the funds is lent out, a lender will be forced into insolvency even if it is financially strong due to the liquidity mismatch. There is no liquidity mismatch risk in FTX lending because loan duration for both lenders and borrowers is fixed at 1 hour. The lender can choose to stop lending when the hour is up. Similarly, the borrower can opt to stop borrowing at the end of each hour.
The lending rate is set by the market and is determined by lender supply and borrower demand. The lending rate is dynamically adjusted by the hour based on demand and supply. When lending rates are set by the market through software with little human intervention, I am more confident that it is set to a sustainable level. During the good old bullish days in late 2021, the lending rate for USD on FTX ranged between 10%-18% for weeks. This year, USD interest rate on FTX ranges between 0.88% to 1.50%. Not much different from traditional bank fixed deposits.
Since FTX is acting as a guarantor of the loan, customers can be sure that FTX will do everything in its power to protect against the event of borrower default. FTX's risk engine will liquidate any users before their net account balance goes net negative. Each user has to maintain a minimum amount of margin (or collateral) to avoid liquidation. Once the margin falls below a certain level, FTX's risk engine will liquidate the collateral in real-time to keep borrower default risk low. The auto-liquidation is handled by software, not humans. There will not be any delay or hesitation because some favourite customer is pleading for leniency. Such a delay allowed a huge rogue customer, Bill Hwang, to cost billions to Wall Street banks when he defaulted on his margin loan. Sometimes, it is safer to rely on software algorithms than humans.
Cryptocurrency markets work round the clock and never rest, not even during weekends, unlike stock markets which are closed at the end of each weekday and currency markets which are closed during the weekend. This reduces the price gap-down risk which may cause the risk engine to liquidate at a lousy price.
To take advantage of the high lending rates on FTX, a user can deposit his cryptos to FTX during the duration when the coin is enjoying a high rate and withdraw when the rate drops to wherever he thinks is safer or yield more. This is what drove me to develop this website to monitor FTX lending rates. I monitor the rates at least once a day. I hope this website is as useful to you as it is useful to me.
Please read this FTX article before you use the FTX lending feature for a deeper understanding.
I put my idle money with moomoo Cash Plus while waiting for investment opportunities because it offers above-average yield and can be withdrawn within days. If you are keen, please read my review and sign up if you like it.