What is crypto lending, and how does it work?
Now that cryptocurrencies are mainstream, it’s not surprising to see crypto lending. Simply put, you borrow money and use crypto assets as collateral. This may change the world of loans forever, even if you don’t have any cryptos!
First, we’ll talk more about crypto loans, such as the available options. Then, we’ll compare them to regular loans and explore their benefits and risks. You’ll see that you don’t need cryptocurrencies to engage in crypto lending!
Every day, cryptocurrency and blockchain technology is changing more aspects of our lives. Learn how decentralized finance (DeFi) is changing this with crypto lending! This includes how we borrow funds for products and services.
What is a crypto loan?
As we said, it involves borrowing money with cryptocurrency as collateral. It’s just like when you get an auto loan or house loan. You can’t get them from a bank, though.
They’re available at DeFi platforms or crypto exchanges. Unlike regular loans or credit cards, they won’t need your credit score. Instead, they will only check your loan-to-value (LTV) ratio.
They will compare the number of crypto coins you have. This will determine the amount you may borrow. Most DeFi lending platforms require a 50% LTV ratio.
Let’s say you have some bitcoin, and you need cash for around $90,000. At the time of writing, the bitcoin (BTC) price is $46,354.18. This means you’ll need around 4 BTC as collateral.
You may have noticed an issue with this crypto lending term. The value of digital currencies often goes up and down. How can it properly secure the loan?
This will depend again on the LTV ratio. If the bitcoin price drops, the loan-to-value ratio goes up. In turn, your collateral’s value goes down.
If the LTV rises too much, your collateral will be liquidated. Your lender may ask you to put more bitcoin as collateral. Sometimes, they might sell some of your coins to keep the ratio down!
On the other hand, it’s great if your crypto asset goes up in value. In turn, your collateral’s value goes up. You may take out more cash against the added value or leave the loan with profit!
What are the types of crypto loans?
You can get all sorts of loans from a bank. Similarly, crypto lending has two options: custodial and non-custodial. Let’s look deeper into them below:
- Custodial (CeFi) loans – These loans have a central authority that holds the collateral and its private keys. You won’t be able to access your collateralized coins. Around 80% of crypto lending options belong to this category. This is changing quickly, though.
- Non-custodial (DeFi) loans – Unlike CeFi loans, these rely on smart contracts found in Ethereum and other blockchains. They’re agreements that execute once certain conditions are met. These cannot lend fiat currency directly. Instead, you get stablecoins that you can swap for cash.
What are the upsides of crypto lending?
Crypto loans can be good for several reasons. After all, it’s better than traditional options in various aspects. The following are just some of the benefits of crypto lending:
- Low interest rates – You can get a crypto loan with an interest rate below 10%. It’s hard to find a lower interest rate from personal loans or credit cards!
- The loan amount depends on asset value – You may borrow as much as 90% of your crypto coins’ value, depending on the crypto lending platform.
- Loan currency options – You may borrow cash like US dollars or other fiat monies.
- No credit check – As we mentioned, DeFi lending platforms often don’t require credit scores. This is why some people with bad credit use this as an alternative to bank loans. However, it’s a good idea to fix your credit score too.
- Quick funds – Banks may take days to send your money. On the other hand, you can get your crypto lending funds in a few hours.
- Lending crypto – This could be a way to earn passive income with crypto. You may lend your digital assets to earn interest. Some crypto exchanges could give up to 10% in return.
What if I don’t have cryptos?
We understand if you’re not keen on cryptocurrency. Perhaps you don’t like how often the prices change. Maybe you want to use other assets as collateral. Or you simply don’t have any.
You like the idea of no credit checks and fast approval. However, you want the benefits we mentioned above. Well, you could do that with blockchain oracles like Chainlink (LINK).
It’s integrated with certain crypto lending platforms. Chainlink allows borrowers to collateralize their loans with their cars, real estate, or other assets not on a blockchain.
What should I keep in mind before crypto lending?
Don’t rush to a crypto lending platform just yet! You should keep certain things in mind before doing so. After all, you should always know about the risks involved. Here are some examples:
- No access to assets – Let’s say your cryptos are about to go down in value. You can’t pull them out if they’re tied as collateral. This could be a problem if you also need money in a hurry.
- Terms of the loan – Crypto lending platforms have different terms and conditions. For example, you might have less than a year to pay back the loan.
- Not all assets accepted – Your lender may not accept certain crypto assets. Make sure your portfolio has the right ones before getting a crypto loan.
- Margin calls – Remember what we said about your collateral’s value going down? This serves as a reminder once that happens. You’re likely to get one too. Cryptos are well-known for their short-term volatility.
- No insurance – The money in your bank account has insurance. This means you may receive compensation under certain conditions. On the other hand, crypto loans don’t have this protection. If the exchange fails, you could lose all your money.
Final thoughts
No matter what loan you have, make sure you pay back on time. It’s a great idea, especially for regular loans. Diligent payments can help you boost your credit score.
If you want high security for your cryptos, you might want to get a hard crypto wallet. These keep your coins away from online risks, such as hackers. They’re also stylish!
Please note that this article is for informational purposes only. Learn all you can about cryptos and other assets before investing. Only use the money you can afford to lose!
Learn more about crypto lending
What are crypto lending platforms?
These are online services that let you borrow money with crypto assets as collateral. Each has different terms and conditions. Make sure to read them carefully before borrowing funds.
Is crypto lending safe?
It’s prone to crypto market movements. If your cryptos go down in value, your loan might liquidate them. Still, some use them as a convenient way to borrow funds.
Is crypto lending profitable?
You could earn up to 10% interest from lending crypto. Note that you can’t truly get rid of risks in investments. Using stablecoins may lower the risks. Research your options beforehand.
Disclaimer: This article is not the official guide to the crypto lending process but is based on the author’s research or own personal experience.
