If Bitcoin investing isn’t risky enough for you, try this

The Bitcoin (CRYTPO: BTC) price has recovered from its 7-day slide, eking out a 0.5% gain over the past 24 hours. One Bitcoin is currently worth US$45,029 (AU$57,729)

That’s well below the record high of US$64,829, reached on 14 April. But it still represents a gain of 55% year-to-date.

The Musk effect

Although Bitcoin’s recent woes can’t all be pinned on Tesla Inc (NASDAQ: TSLA) founder Elon Musk, the world’s third-richest man has certainly had an impact on the value of the world’s largest crypto.

Last week he said that Tesla would stop taking payment in Bitcoin. That fuelled speculation the company might sell some of the US$1.5 billion worth of the crypto it recently bought. He was concerned about the huge carbon footprint associated with Bitcoin mining, which uses almost as much energy as the entirety of Australia.

Musk has since moved to calm Bitcoin investor angst. He wrote that Tesla won’t sell any of its Bitcoin holdings. But his company also won’t use it for transactions until the mining “transitions to more sustainable energy”.

How to squeeze more from your Bitcoin holdings

Investing in Bitcoin remains a risky proposition. The price swings can be fast and furious. Outsized potential gains and equally large potential losses often come in a matter of weeks or even days.

But for those investors with a cast-iron stomach for risk, there’s the opportunity to earn a yield on your crypto holdings.

That’s right, there are crypto savings accounts that will pay you interest on your borrowed Bitcoin.

As Bloomberg reports, various fintech companies will pay yields of 2–6% (or more) to borrow your Bitcoin.

Just don’t lose sight of the increased risks you’d be taking on.

Firstly, the crypto you’ve lent out could fall hard over a period of days, without offering you any immediate recourse to sell.

Also, the interest you’re getting is paid in Bitcoin (or occasionally other cryptocurrencies). So if the price does fall dramatically while you’ve lent it out, the 2–6% interest you’ve received won’t be nearly enough to cover the losses.

Then there’s the creditworthiness of the fin-tech companies themselves. If you’re going to lend to any entity, whether you’re lending dollars or Bitcoin, you want to be pretty confident you’ll be getting that back along with the interest owed.

Still, the extra yield in today’s near zero interest rate world is enticing a growing number of crypto holders to lend some out.

If you’re considering that, long-time Bitcoin investor and analyst Dan Held has the following advice (quoted from Bloomberg), “Never risk your whole stack, and don’t risk what you can’t lose. These are private companies with no federal backing.”

Parker Lewis, head of business development at Bitcoin financial-services company Unchained Capital, echoes that sentiment. “If you do decide to lend Bitcoin, you better be able to quantify the costs because you’re trading the greatest asymmetry that has ever existed for counterparty and credit risk.”

More reading

• 3 explosive shares that defy PE ratios
• Bitcoin’s next step forward aims to address adoption hurdles
• Why these 3 experts aren’t worried about the tumbling Bitcoin price
• Bitcoin suffers largest correction since March 2020
• Why I’m loving this ASX bank share at the moment: fundie

Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Bitcoin and Tesla. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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