Why Do Institutions Give Out Interest-Like Payments For Your Bitcoin Deposits?
The only reason is that they’re making even more money by lending out your bitcoin to other people. But to whom and for what purpose?
Why Would Someone Want To Borrow Bitcoin?
Could they be depositing that bitcoin into another institution which pays even higher interest? That seems unlikely. Most firms reduce the amount you earn as your balance grows. Even if there were a gigachad club which pays higher interest rates than they offer to plebs, why would someone want to pay money to temporarily hold bitcoin?
Could they be using that bitcoin as collateral for a low interest rate loan on fiat? That also seems unlikely as they would need to pay interest on both loans, which would be higher than a pure fiat loan, plus they’d be exposing themselves to margin calls if the price of bitcoin were to dip.
What other possible uses for borrowed bitcoin are there? I think it’s to use in a leveraged trade.
You could use bitcoin as collateral for leveraged long positions, but you could also use fiat so it is unlikely that people are borrowing bitcoin for long or leveraged long positions.
You can also sell short the bitcoin you’ve borrowed, either leveraged or not. This is probably one reason to borrow your bitcoin.
There are also derivatives, some of which require possession of bitcoin. The most common derivatives are options and futures.Source…