You’ve probably heard about borrowing money from banks or other financial institutions. However, have you heard of cryptocurrency loans?
You can be the person who borrows the assets or the person who lends the assets using the crypto lending protocol. In the first case where you borrow, you must have a guaranteed margin and pay interest. In the second case where you are capable of lending, you earn money by lending your cryptos.
What is cryptocurrency loan/lending?
Crypto loan aka Crypto lending lets you borrow and lend cryptocurrencies for a fee or interest. You can get a loan and start investing right away by providing some collateral. This could be accomplished through the use of a DeFi lending DApp or a cryptocurrency exchange.
When the value of your collateral falls below a certain threshold, you must top it up to avoid liquidation. Your capital is unlocked when you repay your loan plus the fee.
For example, it is possible to borrow money and leave a certain amount of Bitcoins on the platform as collateral. As a result, if the price of Bitcoin rises during the loan period, you can use the increased amount to repay the loan. BlockFi and Nexo are two North American crypto loan platforms that provide loans using cryptocurrencies as collateral.
Those who invest or speculate in cryptocurrencies keep these assets in a virtual wallet and wait for them to appreciate before selling for profit. It is also possible to exchange cryptocurrencies and tokens on the market for profit.
The coins that have been stored in the wallet, on the other hand, have no remuneration. Simply, purchasing cryptocurrencies and storing them in a platform account does not generate income for the investor.
As a result, trading them is required to realize the gains. Simultaneously, this market is quite volatile. Many interested parties are afraid of incurring financial losses due to the sale, which is common in this market. As a result, learning about other ways to use cryptocurrencies can be interesting.
Reasons to take a cryptocurrency loan
- Getting a cryptocurrency loan is a fairly quick process.
Borrowing against cryptocurrencies enables individuals to capitalize on the value of their digital assets by using them as collateral for loans. While getting a loan from a traditional bank is a time-consuming and exhausting process, borrowing from “crypto banks” is simpler, easier and faster.
This is because crypto lending platforms do not require you to submit reams of paperwork. You can get your cryptocurrency loan within hours if you have a government-issued ID and the cryptocurrency that will be used as collateral.
- Cryptocurrency loans are more accessible and flexible.
Traditional banking only allows you to get a loan if you have a certain credit score. Decentralized crypto lending platforms, on the other hand, do not consider your credit score. In fact, you don’t even need a bank account to participate in the procedure. This makes lending more accessible to people who have poor credit or no financial history.
Moreover, cryptocurrency loans have flexible repayment terms. Many lending platforms require no minimum monthly payments as long as the loan is repaid in full within the time frame specified. You can also benefit from better exchange and interest rates, as well as a lower service fee.
- Cryptocurrency loan is safe and allows you to maintain your privacy.
If you choose to borrow cryptocurrency from DeFi platforms, you will not be required to provide any of your personal information for the loan. These platforms rely on decentralized lending protocols, which enable crypto lending and borrowing without the involvement of any intermediaries.
Procedure to take a Cryptocurrency Loan
If you have cryptocurrencies sitting in your wallet and want to lend them to other interested parties, it is possible to get part of the interest paid on these transactions. For this, it is necessary to rely on specialized platforms.
Thus, you lend your cryptos in the desired amount to the platform. And it will offer loans to other interested parties. As a result, you are entitled to receive a portion of the interest earned within the agreed term.
To borrow cryptocurrency, you must first select the appropriate platform. There are numerous platforms that allow you to borrow cryptocurrency, but you must search around until you find a reliable one. So, before you borrow a cryptocurrency loan, you should first ensure that the platform is safe and legitimate.
Once you’ve found a trustworthy platform, consider whether you can borrow the type of cryptocurrency you want to lend. Not all cryptocurrencies will be available on every platform. You should also research the yearly returns on the cryptocurrency you intend to lend.
In comparison to traditional loans, obtaining a cryptocurrency loan is very simple. You will be given a loan amount based on how much collateral you can provide. The loan-to-value ratio compares the loan amount to the value of the collateral.
That being said, if you put up $10,000 in cryptocurrency as collateral and receive a $5,000 loan, the LTV ratio is 50%. Due to the volatility of the crypto markets, crypto loans typically have very low LTV ratios.
Precautions before borrowing cryptocurrencies?
Before borrowing cryptocurrencies, you must understand the precautions necessary to operate with digital assets. After all, the price of these assets is linked to supply and demand, so fluctuations are constant and can bring several losses.
In this context, it is common to see examples of cryptocurrencies that have been greatly appreciated in a few days. However, it is also quite common that they have downward movements at the same level. Therefore, you may have considerable financial losses.
Hence, it is necessary to have an investor profile compatible with the high risk of being exposed to this market. Also, consider your financial goals and see if cryptocurrencies can help you achieve them.
Regarding the risks, it is also worth noting that exchanges and other direct investment platforms in this market are not regulated. Therefore, there are more fraud risks or problems in transfers, negotiations, and other operations.
To minimize these risks, finding alternatives to expose yourself to cryptocurrencies in a regulated way is possible. In this context, exchange-traded funds (ETFs) and cryptocurrency funds are options supervised by the Securities and Exchange Commission.
As you have seen, cryptocurrency lending is an alternative for investors and traders who want to trade in this market. However, if you don’t want to expose yourself to a high risk of fraud, you can count on regulated alternatives to investing in cryptocurrencies!