Days ago I received a request of collaboration from Lendary, a lending platform that I did not know; the message was the classic copy/paste p2p community managers send to all bloggers but in this case they started with I am a big fan of you blog, so they got my attention!
Then I read “we have launched an alternative P2P-lending platform that allows users to generate daily returns while eliminating traditional credit default risk” and my eyes rolled. Again a scam. At least I will have another occasion to roast another platform, I thought, so I went to check their website…and imagine my surprise, they are legit!
I will not describe at length what they do because, surprise again, their blog is really well done, you should go and check it out. In short, they are partnering with Bitfinex, a crypto exchange, and allow you to lend USD to traders that want to use leverage. Because of the way margin trading works, the lender really have daily liquidity and the credit risk is (almost, as I describe later) nonexistent.
Too good to be true? This opportunity exists because there is a greater sucker (to use a professional term) at the table, the crypto trader. I also think this is a ‘limited time offer’, meaning the opportunity will disappear in the future.
Margin trading is anything new, I can do it with stocks on Interactive Brokers at 1.5% annual cost (with a GBP based account), so why Lendary can pay ten times more? Because crypto exchanges are still start ups and I do not see a lot of banks willing to lend to them as they do with IB, a listed broker that is dealing established securities. Thanks God we are in the internet era, so if the traditional lenders are not willing to take this risk, someone else might do at the right price, you. The offer side of the trade is now fixed, what about the demand side?
Enters the crypto trader. Have you ever watched Bitcoin chart? Price swings are the norm, not the exception, volatility is massive and we talk about the most established, the OG of the crypto currencies. Imaging the price jumps you can have on the newer coins. This volatility (and other cultish-like features) attracts greedy traders in pursue of their first Lambo. If your starting capital is just USD 1k, you can be the best trader on Earth and still it will take you years to have the 100k to buy your dream car…or you can borrow money and get there way faster.
I do not call them suckers because they trade crypto, they are because day trading is really hard and it is way harder if you have to pay a 15% cost on top of it (Lendary gives you only a cut of the total cost, a part goes to them and another part goes to Bitfinex). If you are wondering as I do why traders are willing to pay such a cost, Lendary has a pretty convincing argument. Traders do not see the yearly cost but the daily one, which is ‘just’ some basis points; this cost is actually lower than the trading fee they pay to Bitfinex to buy/sell, so psychologically easy to dismiss, even if that is a one off cost while they pay the margin cost every day their position stays open.
For Lendary business to work, you need these ingredients:
- a constant stream of suckers to come and lose their money (it works also if they gain but this is obviously impossible from a collective point of view)…which is possible given that casinos, betting, daily FX trading continue to thrive on the same premise
- volatility in cryptos: if the dream goes, traders will go with it
- bigger lenders disbelief: once crypto exchanges become established businesses, hedge funds first and traditional banks later will start to lend to them and their need for your money will disappear. Take LendingClub p2p lending as an example…
Few random notes on what I read on their blog:
Managed Account
The advantages of this solution are listed there but having to manage another account is a pain in the ass. When I moved out of Luxembourg, I left my bank account open because, as a friend said, “in life, you never know when you will need an account in a fiscal paradise AAA rated country”; this is just an example to say that these things compound faster than the interests you get. Investors bear the risk of Bitfinex defaulting, at this stage I just wish Bitfinex will implement the same funding solution by themselves and cut out Lendary (sorry!).
Credit Default Risk
In the blog is not mentioned the real way you can lose money: when market is illiquid, prices do not go from 20 to 10 in a ‘continuous’ fashion, they might jump from 20 to 10. If the margin call for the borrower triggers at 20, the market order to close their position will be filled at 10; the borrower will lose all their equity, but the loss from 20 to 10 will be for the lender (legally speaking it is a trader liability but good luck recover those funds).
Another, quite common for crypto exchanges, way to lose your money is if the exchange is hacked and the crypto currencies are transferred to another wallet. I do not want to suggest that Bitfinex does not have proper controls in place but given the frequency this happens and the fact that you cannot reverse a crypto transfer by design, you should at least keep this risk in mind.
Conclusion
As of the time of writing, I do not have an account open with Lendary and do not have any collaboration with them. I found their email a good starting point for this post, given that I see potential in the service they offer. You are given the possibility to close a (temporary) gap in the market by taking some risk, in this case I think the return if worth the risk.
I am still building my position in Iuvo, my p2p investments are concentrated there; I might start to use Lendary in the future but keep in mind that everything I wrote here is based on me having no skin in the game, most crucially I do no get anything from them if you decide to invest.
What I am reading now:
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