How can one lose money via Poloniex Lending?

[monbux]

I've been doing some reading and understand that it is possible to lose money when lending on poloniex, when the markets are illiquid or when the site gets hacked/shuts down.

The question is, how likely is the chance of one losing money from lending when the borrower is forced to liquidate, but not quickly enough?
Has it ever happened when lending with BTC?

[eddie13]

Thousands of loans for me and never ever lost a satoshi..

But with the current drama the gox possibility may be higher risk than low liquidity margin calls..

I still have change bouncing around there..

[monbux]

I like Uncle Pegasus's answer:

Let Uncle Pegasus dispense some priceless wisdom.  :
  
People are going to get so excited that they can buy on margin, so when they see a coin (ahem, ETH) go up and up they will naturally think, "Gee.... why am I limiting my profits!?  Let me borrow some more ETH based on the ETH I already own!"  They won't even look at the lending rates because who has time to worry about that?  
  
Then the price of ETH will go up.  
  
Others will see this and come to same conclusions, and also borrow ETH based on the ETH they already own.  
  
Then the price of ETH will go up.  
  
Suddenly, the price will stall slightly.  Now, the first borrower has a comfortable liquidation margin (to the point where it's not even an issue).  He thinks.... hmmm.... it looks like the market may retract soon and I will lose even more than usual based on the retraction.  Well, let me just fire a few more margin bullets at this problem and "help the cause".  
  
Then the price of ETH will go up.  
  
Others will follow suit, all doing their part to keep the price of ETH on the uptrend because they are all margined to the hilt in this thing together now.  All of them are pumping ETH hard because they all know they have a lot to lose now.  Also, those prices to liquidation are suddenly a lot closer than they once were.  The air of enthusiasm suddenly takes on a slightly desperate edge.
  
Then the price of ETH goes up.  
  
But nothing can go up forever.  Eventually someone will take profit.  Eventually one man in the madness will say, "Ok, enough.  Let me get the fuck out of here before this shit goes iceberg."  
  
Then the price of ETH goes down.    
  
The most margined-to-the-hilt fool is hit first.  His entire account is liquidated and sold off to meet the demands of those he owes.  This floods the ETH market with a little extra ETH than usual.  Supply will outstrip demand, especially at these inflated prices.  
  
Then the price of ETH will go down.  
  
This sets off a nuclear fission reaction that will cause ETH to FUCKING DROP LIKE A ROCK.  
  
And this children, is a story as old as time: the margin crash.  And we are going all get to see it again soon, and the traders, lenders, and even Poloniex will all learn a valuable lesson.

I have been lending at poloniex for a very long time as well. But I'm still wondering how many people have actually lost btc when lending.

[Quickseller]

If you lose money (eg your principal and interest are not repaid) via lending on an exchange such as Poloniex, then you will probably not want to continue lending out your money, even if you lose a small portion of what you lent.

If it is known that a small percentage of lenders end up loosing money via making loans on Poloniex, then others will hesitate to lend because the EV of making a loan may be unknown and/or negative.

Poloniex does make some money from loans that it's customers make via lending fees, however the *real* way that Poloniex makes money via loans made on it's platform is the increased liquidity that lending provides, which attracts users who want to take on large positions to their platform, which both generates trading fees and adds further liquidity to their platform even if they do not use margin.

For the above reasons, I think that it would be likely for poloniex to step in and cover losses when a borrower's account has negative equity (eg., they cannot fully repay their loans) in order to maintain confidence in their lending markets. They may not be able to do this if there are very large lending related losses.   

[monbux]

If you lose money (eg your principal and interest are not repaid) via lending on an exchange such as Poloniex, then you will probably not want to continue lending out your money, even if you lose a small portion of what you lent.

If it is known that a small percentage of lenders end up loosing money via making loans on Poloniex, then others will hesitate to lend because the EV of making a loan may be unknown and/or negative.

Poloniex does make some money from loans that it's customers make via lending fees, however the *real* way that Poloniex makes money via loans made on it's platform is the increased liquidity that lending provides, which attracts users who want to take on large positions to their platform, which both generates trading fees and adds further liquidity to their platform even if they do not use margin.

For the above reasons, I think that it would be likely for poloniex to step in and cover losses when a borrower's account has negative equity (eg., they cannot fully repay their loans) in order to maintain confidence in their lending markets. They may not be able to do this if there are very large lending related losses.   

I agree with the last statement. However, AFAIK, they don't currently do anything like that. I'm confused as to what will happen if a margin trader could not liquidate in time - I feel like poloniex wouldn't even notify the lender if they lose some of their principal.

[monbux]

bump, would like some more insight

[Quickseller]

[...]

For the above reasons, I think that it would be likely for poloniex to step in and cover losses when a borrower's account has negative equity (eg., they cannot fully repay their loans) in order to maintain confidence in their lending markets. They may not be able to do this if there are very large lending related losses.   

I agree with the last statement. However, AFAIK, they don't currently do anything like that. I'm confused as to what will happen if a margin trader could not liquidate in time - I feel like poloniex wouldn't even notify the lender if they lose some of their principal.

It is my understanding that there have been a couple of situations in the past at bitfinex in which some margin accounts had negative equity (eg, there was insufficient collateral to repay the margin loans due to high volatility, and insufficient liquidity) -- I understand that bitfinex covered the losses in these cases and did not even notify the lenders. I believe one of the times this happened was when someone quickly sold 20,000 BTC (IIRC) after the 1st block signaling XT was found in August 2015, and the price fell to ~$160 from ~$250 in a matter of minutes.

I don't think that any exchange is going to advertise that they cover losses because they probably want to reserve the right to not cover losses in the event that the losses are greater than what makes sense for them to trade. I have heard Phill from Bitfinex (the CSO) say in the past that if something "broke" Bitcoin that caused its price to quickly go to near zero and not recover (or some similar situation), then lenders would likely face losses.