How to Setup Bitfinex Margin Funding for Passive Income [PDF]
As you already may know, Bitfinex is advanced crypto-currencies trading platform. It offers advanced order types, margin trading, margin funding and other cool things. Margin funding is a liquidity feature, which goes hand in hand with the margin trading and comes in play when we are talking about passive income.
Bitfinex allows you to provide liquidity in the form of bitcoins and/or dollars to traders, who want to trade on margin. Essentially Bitfinex allows you to lend your money to traders and earn daily interest which can be up to 0.1% per day and sometimes even higher!
Read below and learn how to set up your account, how much you can earn and what risks are involved.
But before you begin, there is great news for you!
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After you finish registration, I recommend you to adjust your account settings:
In the Account settings open “Fees” section and under “Default currency for fees” choose “USD” and select “Asset trading fee” option. That way all your fees will be taken in the USD currency. It is much easier to track fees in fiat currency which is not so volatile like bitcoin and we are all used to it (well, at least I am).
Now open “Account Type” section and choose “Trader” as this account type grants you access to all Bitfinex features: exchange, margin trading and margin funding. While setting up passive income, we will use exchange and margin funding features.
So, make sure that you are logged in and let’s proceed with passive income configuration!
3 Step Passive Income setup
STEP 1. Deposit BTC to your Bitfinex account
First you need to deposit some money to your account. You can use either of the provided methods to do that, but I prefer sending bitcoins as it is quick, free and does not require account verification. The more you deposit, the more you will earn, but if you want just to play around – the allowed lending minimum of 50$ will be enough. If you want to get a significant return on your investment, then I recommend you to deposit at least 5000$ (or more).
STEP 2. Exchange BTC to USD
If you’ve chosen to fund your account using bitcoins, then you need to exchange them to US Dollars. Why? Because interest rates in USD usually are much higher than in other currencies. Makes sense, yes? You can always check current rates in Margin Funding page. And another reason is that your money will not be influenced by high bitcoin volatility.
To exchange bitcoins to USD, first you need to transfer bitcoins to Exchange wallet, as it is the only wallet which is used for currency exchange. You can accomplish this task in Manage wallets page.
Ok, now when you have some bitcoins in your Exchange wallet it is time to exchange them to Dollars.
First open BTC/USD Trading page. Then:
- Switch Order Form to the exchange mode by clicking “Exchange” hyperlink next to the form title.
- In the “Amount (BTC)” field enter the amount of BTC you want to exchange.
- In the “Order Type” box (which is above the “Price” field) choose value “Market” as this will allow you to exchange your bitcoins using best, currently available, market price and your exchange will be instant.
- Finally press “Exchange Sell” button.
Congratulations! You have just exchanged your bitcoins to USD!
STEP 3. Enable margin funding "auto-renew" feature
To finish passive income setup, you need to transfer USD from Exchange to Deposit wallet as the latter is used for the margin funding. Again, you can accomplish this task in Manage wallets page.
Finally, when you have transferred USD to your Deposit wallet, you need to enable margin funding auto-renew feature.
First open USD Funding page and expand “Auto-Renew” section if it is collapsed. Then:
- Set the lending period to 2 days as this allows to effectively re-invest your earnings and you will always be getting accurate and competitive rate. In fact you can set this parameter to whatever you are comfortable to. I prefer 5 days as it has proven for me so far the best results.
- Now you must enter an interest rate. You can pick it manually, but as we want to have everything as passive as possible, I suggest you to select FRR (Flash Return Rate) checkbox. This lets Bitfinex give you the optimal interest rate based on the average of all fixed-rate positions, of all terms, weighted by their amount.
- Finally click “Activate” button.
And that’s it. You’re done!
When "Auto-renew" is activated, all the balance available in your Deposit wallet is automatically offered at your set parameters. You’ll need to wait a while (this can take a few minutes or a few hours), but eventually you’ll see your money in the “Provided” section, earning you daily interest.
How to get the most out of this
The good thing about Bitfinex margin funding is that you can’t lose. But you should aim for more than just average results. That’s why it’s necessary to know what and why you're doing.
I’ve already described one lending strategy based on the flash return rate. It is the most common strategy as it is simple and it requires minimal effort to manage your investments. However, it has several drawbacks as well.
Depending on market conditions, flash return rate can be significantly higher than market rate. Moreover, FRR is used by a huge number of people, so there is a very big competition between all of them. Therefore it can take a lot of time for your offers to be taken and your money can stay without generating interest for a very long time.
So, how to avoid those delays?
One method is to set a competitive auto-renew interest rate manually. But this method requires some care as you will need to adjust this rate every few days to adapt it to a quickly changing market conditions.
To maximize my income, I follow a few simple rules. As I do not want to waste my time on margin funding management, I use FRR instead of custom interest rate. I also turned on notifications, what allows me to receive a message when my funds are returned. Once I receive a notification, I know, that my money is returned to my wallet and I have two options: do nothing and let auto-renew to manage my investments, or I can login to my Bitfinex account and manage them myself. Usually I choose the latter option as it allows me to maximize my income and to avoid possible lending delays.
So in this case, I offer my unused funds manually at my chosen lending period and competitive interest rate. If current market rate is high, or I anticipate it to go down, I choose a longer lending period (15-30 days) thus scoping interest rate. Otherwise I set it to 2-5 days. There are also some rules which I follow to select a competitive interest rate, but this topic falls out of the scope of this article. Find out about them on my other blogpost - "How to Choose Bitfinex Margin Funding Rate".
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How much you can earn
I’ve made some calculations and below you can see two data sheets and a graph. First data sheet shows annual income in US Dollars, depending on the daily interest rate and on the amount invested.
Next data sheet and graph shows income in percentage, depending on the daily interest rate and on the investment time (in years).
As you can see, even most pessimistic investment conditions, are likely outperform the best investments your bank can offer you. The day I wrote this article, USD margin funding rate was slightly more than 0.06% per day. So under these conditions you could earn over 20% per annum and with interest reinvestment your 4-year return would exceed 100%.
Lending out money involves risk. One thing to consider is Double Blind Lending. That means, that borrower and lender doesn’t know each other. It’s up to you to decide whether it is good or bad, but I’m comfortable with this.
Another thing to consider is that when a trader borrows money from you and takes a position, he also takes the risk in case the market price will move in an unfavorable direction. If the market moves so far against the trader that the trader is close to not being able to cover the loss with what is available in his trading wallet, then the trader will be issued a margin call and his position will be forcibly closed. But if the market moves so fast, that the forced execution of his position ends up giving the trader a negative balance, then the person lending the funds out to the trader can lose both - the generated interest and part of the principal.
It is extremely rare that lenders lose money due to margin calls in a fast-moving market, but it can happen and it is something worth considering. There is no magic here: you can't expect to be able to lend out at high rates without there being any risk involved.
And final thing to consider is what happens if something happens to Bitfinex itself - 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.
Bitfinex is a platform, which can be used as a high profit passive income source. The average interest rate on margin funding can vary from 0.0X% to 0.X% a day, so you can earn as much as 60-100% a year or as little as 10% a year, or anything in between.
High return usually directly relates to high risk. However, Bitfinex Risk/Reward ratio in my opinion is rather small, which makes this platform a perfect tool for doubling your money.
Invest safe and don‘t forget the golden rule: Only invest what you can afford to lose!
Thank you for reading and take care!