It means “Hold On For Dear Life.”
The legendary phrase was coined by Game Kyuubi during a drunk, semi-coherent rant when he wrote:
“WHY AM I HOLDING? I’LL TELL YOU WHY,” he continued. “It’s because I’m a bad trader and I KNOW I’M A BAD TRADER.”
From that moment the term HODL became a rally cry for investors of every level throughout the cryptosphere.
But is HODLing the wisest thing to do these days?
I’m not talking about HODL vs trading. If you’re not a good, experienced trader than best not to step into that arena and lose your savings.
No, I’m talking about a way you can hold your bags of cryptocurrencies while still turning a modest profit, say, from 4% to 8% per year.
It’s called DeFi: Decentralized Finance
Decentralized finance involves lending your cryptocurrencies and earning interest from them.
It’s a whole new way of thinking about finance for cryptocurrency HODLers. A recent Coinbase blog post puts it this way:
“Cryptocurrency’s promise is to make money and payments universally accessible– to anyone, no matter where they are in the world. The Decentralized Finance (DeFi) or Open Finance movement takes that promise a step further. Imagine a global, open alternative to every financial service you use today — savings, loans, trading, insurance and more — accessible to anyone in the world with a smartphone and internet connection.”
Imagine it this way: two people anywhere in the world can negotiate a loan without a bank in the middle. The person who borrows can find the best deal and lock in the best interest rate without having to undergo a credit check; And the person who lends the funds can feel safe by locking in collateral that will be automatically liquidated if the borrower defaults.
These types of DeFi loans are possible thanks to smart contracts.
A smart contract will protect both the lender and the borrower; it’ll automatically resolve payments, calculate interest, and liquidate collateral if certain conditions are met. These types of smart contracts can be programmed to become far more sophisticated than simply sending and receiving cryptocurrency. If you want to learn more about this we suggest checking it out Cypherpunk Holdings.
But you don’t need to be a smart contract programmer to take advantage of this.
How to Lend Your Cryptocurrencies, Safely and Profitably
Decentralized Finance is a rapidly growing industry. It may be small still, but the rapid pace of development has already brought several solid companies to our table.
There’s a great source I’ll quote below, if you’re interested then check this article, and it starts off like this:
“You should consider at least the following factors:
- Security of your funds
- Insurance on your funds
- Crypto interest rate
But what about the Bitcoin lending sites? In this brave new decentralized world of finance, how do we stay safe and make profits?”
These are a great start for the fundamental questions to consider. The article goes on to list those three lending sites and how they compare to each other in terms of fees, security, and insurance. It also lists a few bitcoin lending sites to stay away from.
The basic concept of lending out your cryptocurrencies with DeFi
Let’s start with the basics: Who wants to borrow your crypto?
People need loans for a range of reasons: buying a car, refinancing debt, etc.
Borrowers who sign up for one of those three DeFi platforms may be just like you — HODLers.
They don’t want to sell their bitcoin or crypto, but at the same time they have expenses coming up they need to cover.
The beauty of DeFi is that borrowers can put up their bitcoin or crypto as collateral. They don’t need to sell it. And the DeFi platform will give them a loan in stablecoins or fiat.
The borrowers can then use those funds to buy what they’ve been looking to buy. Over time, the borrowers will pay back their loan with interest. Then they get to withdraw their collateralize bitcoin and (hopefully) sell it for the gains it made as the months or years went by.
Why and how can you lend your crypto to them?
When you use one of those three bitcoin lending platforms you not only don’t need to write a smart contract and find a borrower yourself, you also are covered by the insurance or protections the DeFi platform offers.
When you lend out your bitcoin or crypto, you’re not lending it directly to the borrower. Instead, your bitcoin is deposited safely in the cold wallets and other storage mechanisms of the DeFi platform. The DeFi platform then lends out its own reserves of fiat or stablecoins to the borrowers.
All this is written in smart contracts with the proper code in place. Many of these DeFi platforms also offer deposits in BTC, ETH, and several other top 10 cryptocurrencies. All the while they don’t charge you any withdrawal fees, deposit fees, transaction fees, early termination fees, origination fees, or any of the other fees that make traditional banking such a pain.
An additional benefit is that you are not locked into anything
Since you’re not lending your crypto directly to a borrower, you don’t need to lock up your bitcoin or crypto for the length of time which the borrower needs.
Instead, your deposit goes into the DeFi’s cold wallets and other pool storage mechanisms. It can then be withdrawn at any time. Just like a borrower doesn’t need to borrow funds for the entire duration of the term — they can pay off the loan any time.
DeFi: The future of Banking?
It turns out that lending your crypto can be safe and profitable. Smart contracts are opening up the doors of finance to crypto HODLers, enthusiasts, and even the unbanked.
If someone has crypto on their wallet, they don’t need to go to a bank for a loan burdened with a bunch of fees. Instead, they can put their crypto up as collateral and get a loan on the spot.
Decentralized Finance looks poised and ready to become the lending method of choice for people around the world.