Cryptocurrencies are an asset class known for volatility. They bring high risk but potentially incredible returns. As a long-term investment, they also demonstrate tremendous opportunity.
As crypto has become more mainstream, the space has developed decentralized systems for traditional financial services. In addition, the demand for crypto financing has led to lending platforms, which has created new opportunities for several parties.
Crypto lending presents opportunities for both lenders and borrowers:
- Borrowers can get a secured loan to access the cryptos they need.
- Lending platforms make a profit by charging interest.
- Users on lending platforms can earn passive income by staking the required cryptocurrencies.
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Can You Borrow Against Your Crypto?
Yes, you can borrow fiat currencies by providing crypto as collateral. The process of borrowing against your crypto usually is quite simple. You just need to find a lending platform that offers the opportunity.
What is a Crypto Loan?
A crypto loan is a type of personal loan where the borrower’s crypto assets serve as collateral. The borrower pledges a balance of crypto. They then retain ownership over it but lose some rights, including the right to trade or send it while it’s pledged.
Crypto-backed loans function similarly to securities-based loans. You just pledge your cryptocurrency assets to obtain a loan, then pay the loan back over time. These opportunities are generally offered by:
- Cryptocurrency exchanges
- Dedicated crypto lending platforms
- Other decentralized finance projects
How Does Crypto Lending Work?
The first step to crypto lending is finding the right platform to get a loan from. The exchanges and lending platforms that offer loans differ in their offerings. So, you can start by comparing the rates offered and any minimal requirements (such as minimum loan size, etc.).
Once you choose a platform, you need to create an account. Then, you need to fund the account with the crypto you are going to pledge as collateral. Larger loans require more collateral.
Most platforms make the process simple and automate much or all of it. You can use their built-in calculators to glance at the different requirements for different loan sizes. You can also use the same calculators to compare the interest rates for the different loan sizes.
Once you’ve found the right deal for you, you need to review your formal offer. If you accept it, you will pledge your crypto, and the funds should typically be dispersed to you quickly. Your crypto will be locked in from that point on, and your repayments will begin as per the schedule you agreed to with your lender.
Once the funds are dispersed, you enter a repayment period as traditional lenders offer. This whole process provides several benefits to borrowers who aren’t active traders. If you’re simply holding cryptos, using them for crypto loans can be advantageous under some circumstances. However, there are also some risks unique to crypto-backed loans that you should be aware of.
Invest in over 30 cryptocurrencies from your checking account with no trading fees with the Current mobile app crypto feature.
Titan is an investment platform with a team of experts actively managing your portfolio based on your chosen strategy, including cryptocurrencies.
Alto IRA allows you to invest in stocks, bonds, mutual funds, ETFs, real estate, cryptocurrencies, and even gold for your retirement.
Pros of Crypto Loans
Crypto loans offer some unique features that make them advantageous.
Relative to many traditional loans, crypto-backed loans offer low-interest rates. Their rates are typically higher than those of mortgages or auto loans (assuming you have good credit). However, if you compare them to many personal loans, especially credit cards, their rates are very affordable.
Requirements and bars to entry are the main factors stopping some people from getting traditional financing. With crypto-backed loans, the conventional creditworthiness factors don’t apply. There are no credit checks, and your debt-to-income ratio won’t be analyzed. Credit checks with traditional lenders are far more thorough.
The primary marker of “creditworthiness” in the context of crypto-backed loans is your pledge. Your portfolio value is a good marker of how much lenders will be willing to lend you. With some, this may be 50% of your portfolio value, but it can be much higher with other platforms. Overall, you’ll run into fewer limits with crypto-backed loans than with traditional loans.
Speed and convenience are also smaller benefits, but they shouldn’t be overlooked. As should be expected from the crypto industry, approval and the dispersal of funds are very fast. It usually shouldn’t take more than a few hours to complete the process.
Lastly, while you’re at it, consider finding a platform that’s good to borrow from and to lend to. Since you’re already exploring the lending marketplace, you can consider the lending opportunities that provide you with passive income. Most of these platforms also enable users to lend digital assets in exchange for high APYs. On many platforms, it’s easy to gain an APY of over 10%.
Cons of Crypto Loans
One of the main risks of crypto loans is the potential for the value of your assets to drop while they are pledged. Cryptocurrencies are notoriously volatile assets, so this risk can’t be overlooked. If the value of your pledged assets drops while pledged, you can end up owing back more if you default on the loan. If the value drops significantly, you’re at risk of owing far more than you borrowed.
This leads to the second potential drawback, which is a margin call. If the value of your assets drops below the applicable threshold for the loan, the lender will require you to increase your pledge. In other cases, a lender may even decide to sell some of your holdings to reduce your loan-to-value ratio. Again, this is an area where the volatility of crypto increases the risk.
It’s also worth noting that each lending platform has its own list of assets they accept as your pledge. If your digital assets are less widely accepted, you may have trouble finding a lender that will accept them.
