IMPORTANT NOTICE: Since writing this article the service in question has closed its doors. Fortunately there is another: please take a look at my review of CoinLend to earn interest on Bitcoin, USD and other CryptoCurrencies.

For the last week or so I have been testing out a new lending bot service for the peer-to-peer margin loans market on Poloniex. I thought it may be useful to Cryptorials.io readers for me to share my experiences and opinions on it.

An Introduction to Lending on Poloniex

For those of you who aren’t familiar with Poloniex, they offer ‘margin trading’, in which traders use loans to leverage their long or short positions. Using ten times leverage, for example, when the market moves by just 1% the trader will take a gain or loss or 10%.

These loans are funded by a peer-to-peer market, in which other users are able to make loan offers and set their own requirements for the daily interest rate paid on all outstanding loans. There are risks associated with making a loan like this. The first of these risks is that the borrower will make a losing trade and be unable to repay the loan. This is managed through a maintenance margin system that automatically closes a trader’s position before they get close to losing all of their own collateral. For example, in the 10x leverage example above an 8% market move could lead to 80% losses for a margin trader – at which point their position is automatically closed (assuming a 20% maintenance margin). This means that the borrower should only ever be able to lose their own money, and not any of the money they have borrowed, assuming that the maintenance margin provides sufficient breathing space for their position to be closed before the loses go beyond the level of the trader’s own initial capital. A risk remains that if the market moves very suddenly and substantially there will be not be sufficient open orders for the exchange to be able to close all of the trades which have hit their maintenance margin, leading to a loss for lenders. You also need to hold your coins on the exchange while using this service, which always opens up the possibility of theft or fraud. Despite these risks, this is generally the safest form of peer-to-peer lending in cryptocurrency and there have so far been no losses since Poloniex started offering this service.

Managing Your Loans

The one big problem with using this market as a lender is that the market rate for daily interest is constantly changing, making it very difficult to get the best rate.

Manually managing your loans effectively is almost impossible. Your offers are often broken up into many small loans to different people, so you quickly find yourself with orders constantly expiring and new offers needing to be placed to keep your coins on the market. To help with this Poloniex themselves offers an ‘auto-renew’ feature, but this is far from ideal. If you set your loans to auto-renew at too high an interest rate you may find that they spend a lot of time sitting there in offers that aren’t being taken, but if you set it too low then you are getting less interest than you could be getting. There is no way to simply pick the best interest rate and then leave it to take care of itself, because the best rate to select is constantly changing.

Using a Lending Bot

The use of a lending bot effectively allows you to ‘auto-renew’ at the current market rate rather than at a rate you have pre-selected yourself. The idea behind this is that you can make sure your coins are always lent out whilst also ensuring that you always get the best available rate.

This can be done by using a software program called a bot which operates on a remote computer and accesses your account using the Poloniex API.

PoloniexLendingBot.com

This new service offers an open source version of its bot that you can use for free, as long as you have a server to run it on and the necessary skills to get it working (there is no support, and its not tested on a wide range of different operating systems, hardware set ups and so on, so this may be difficult).

They also offer a managed service in which they run the bot for you on their servers, in return for a 10% cut of whatever profits you make from using it.

Because of the way that Poloniex has structured their API this can be done in a completely trustless manner. You can generate an API key (basically a password which the bot uses to access your account) which does not include trading or withdrawal permissions, so the bot is only able to manage the funds which you have transferred into your lending account on Poloniex – there is no way for it to steal your coins.

Payment is accepted one month in arrears, so after you have been running the bot for a month they will send you a bill that you must pay if you want to keep it running for the next month.

How much can you earn?

The amount of interest your will earn depends on the lending market itself and cannot be predicted in advance.

Prior to using this bot I had been lending on Poloniex for several months using auto-renew with a little bit of manual management; I would keep an eye on my account whenever I could to cancel and replace orders which weren’t getting filled. Over this time the average interest rates seemed to be the equivalent of around 20-30% per annum (including compounding), or perhaps a little bit more when you factor in the odd temporary surge up to 1-2% per day. Because I wasn’t always getting the best rate, and because my coins weren’t always lent out, I would estimate that I actually earned about 60-70% of that. Since starting to use the lending bot to get the best possible interest on my Bitcoins and other altcoins I would estimate that I am earning more like 90-95% of the average market rate.

My conclusion: even after paying the 10% fee I seem to be earning more interest using the bot than using auto-renew. Whether this will be the case for you as well depends on how actively you are able to manage your account and how volatile the lending rate is in the future. I have also found the risk / reward ration of Poloniex lending in general to be much better than any other form of peer-to-peer lending for Bitcoin. I briefly had a go at peer-to-peer lending for personal and business loans, testing multiple different sites, but ended up losing more on defaults than I earned in interest on every single site I tested. Personally, I would recommend giving the lending bot a try if you are willing to take a bit of a risk in order to increase your Bitcoin stash with daily interest payments.

Test out the bot for yourself at PoloniexLendingBot.com