Bitfinex, short for Bitcoin Financial Exchange, is a Hong Kong based trading exchange allowing for the purchase and sale of Bitcoin, Litecoin, Darkcoin and now Terahertz (THS) of cloud based mining power. What Bitfinex is used for most often by most traders is leveraged Bitcoin trading, meaning they can borrow USD or BTC and use it to go long (buy) or short (sell and hope it goes down to buy back cheaper) in Bitcoin.
If you are familiar with stock based margin trading then leveraged BTC trading is easy to understand. The leveraged part is borrowing and then the trader does their trade to buy or sell BTC. In the USD world, if you open up a Schwab account and qualify for a margin account, when you borrow to buy more stock, who do you borrow from? Schwab, your broker/dealer, is who you borrow from and you pay interest back to them. So Schwab (and they are not the only ones that do this, they all do) earns interest by lending you money and then earns more fees when you use that money to buy more stock. It's a great deal for them and if you are right on your guess on your stock then its a good deal for you too. However, you have to pay them whether your stock purchase makes money or not. If your trade loses enough money, they automatically close it for you so you can pay off your margin position.
In my above example, we are going to play the role of Schwab and lend our money to a BTC trader. So far, Bitfinex is the only exchange where we can do this. Like all peer lending platforms, we are playing the role of the bank or in this case the broker/dealer. Bitfinex calls it being a liquidity provider offering total return swaps. Let's look at some of the different things about lending on Bitfinex.
Features of Lending on Bitfinex
Double Blind Lending
Like our USD loans with Prosper and Lending Club, the borrower doesn't know who we are and we don't know who the borrower is on Bitfinex. Whether this is good or bad or neither is for you to decide. I'm comfortable with this.
Bitfinex loans max out at 30 days. This means there is more ongoing maintenance of loans in this account. It also is a very sharp contrast to USD loans that go 3 or 6 years. I like how this mixes up all of my loan terms and makes me less susceptible to big changes in interest rates or the price of Bitcoin. It's a diversifier for us.
Lend In Bitcoin or USD or both
One unique feature is that we can lend in BTC, USD or both at the same time. This is what the BTC rates look like today.
and this is what the USD rates look like
The numbers look like they are pretty low with an offer rate of 0.029% for BTC and 0.059% for USD however, this is a daily interest rate. For BTC, 30 days at .029% equals 0.87% and for USD .059% for 30 days equals 1.77%. Both far exceed bank interest rates and the USD rate is more than my USD loans on Prosper and LC most months.
No Borrower Risk, Counterparty risk
There is no borrower default risk due to Bitfinex being able to close out a losing trade and give us back our money. That does not mean this is a riskless loan. In fact, some believe the risk is greater with counterparty risk than it is with borrower risk. In this case, the counterparty that is our risk is Bitfinex itself. Our real risk is what happens if something happens to Bitfinex either operationally so they can't close out a losing trade or what happens if Bitfinex goes bankrupt. This is a concern for almost any BTC based platform out there due to their relative newness.
Given the solid steady returns with my Prosper and LC loans, the wild volatility and high rates of my other Bitcoin based loans, I like having this option to stay in Bitcoin loans but with what looks to be more predictability. I'm a big fan.