Crypto loans are all the rage, but are the risks worth it!
The crypto market has grown exponentially in recent months, and investors are seeing cryptos for what they are worth. However, cryptos were only limited to payments and money transfers until recently. There was still room for discoveries in which decentralized money could excel. Thus, it paved the way for automated cryptocurrency lending and borrowing. What has made crypto lending extremely popular is that it is an easy way to generate passive income.
If you’ve accumulated a fair amount of crypto assets but are considering selling them because you need physical cash, check out the bitcoin price chart. Donating Bitcoins will mean that you will not be able to enjoy the benefits when the prices go up. Thus, the concept of bitcoin lending is gaining popularity.
What are crypto loans?
Crypto loans are built around a simple concept, lending money against digital assets. Borrowers present cryptocurrencies as collateral to obtain loans in fiat currency or stablecoins. They can use any form of crypto like Bitcoin, Ether, or Litecoin, which will work as security in the event of a failed repayment. You can use any british bitcoin profit to access loans.
It can also happen the other way around when borrowers use fiat money to borrow crypto assets. This opens up the possibility for lenders to use their dormant crypto assets by giving them to borrowers in exchange for interest.
After the lender and the borrower come to a mutual agreement on the interest rate, the loan is processed, the borrower receives the loan amount in their bank and pays the EMIs to the lender on a monthly basis. Once the amount is fully repaid, the lender releases the collateral.
If the lender had provided crypto assets when the loan matured, they could retain ownership. It’s a great way to keep assets and get something out of them.
Where to lend and borrow cryptocurrency?
ZebPay, Vauld, and similar cryptocurrency exchange platforms have introduced the ability to lend and borrow crypto coins. The annual returns you generate depend on the cryptocurrency you lend. For Bitcoin, it’s up to 3%, Ethereum and Dai gain 7%, and Tether gain 12%. For different platforms, interest rates may vary.
However, to lend your cryptocurrency, the mandatory rule is to deposit your coins into the exchange wallet. There are no options to link external wallets on such platforms.
When the loan matures, they deposit the principal amount along with the return into your trading portfolio. You have the option of withdrawing your cryptocurrency at any time prior to maturity, but this will cost you a penalty on the returns.
Crypto Loan Vs. Bank Loan
People invest in cryptocurrency with a futuristic lens. They plan to hold onto their assets in the hope of a price spike. But storing the crypto coins in the wallet is not only an unproductive way to own assets, but also limits their supply in the market. The best way to use these assets is to use them as collateral to take out loans that can be used for personal purposes.
For lending your cryptocurrencies, you can get interest returns of up to 8%, while for fiat currencies it is only 1%. As much as it is advantageous for lenders to earn passive income, borrowers have a similar advantage when they buy cryptoassets from one exchange and sell on another to benefit from margin trading.
Considering the number of unbanked adults in the world, the crypto loan looks like a game-changer. There is no obligation for a bank account to lend or borrow cryptocurrency. The process is simple and takes less time than banks. The transaction does not have to be limited to a specific location because the work is done online.
A bank loan is usually sanctioned only after a credit rating analysis, so those in need do not necessarily have access to such help. People with low or no credit scores suffer from this system and end up paying high interest rates or having their loan application rejected. But crypto loans are available to anyone who owns cryptocurrency and is willing to lend it in exchange for interest.
Loan terms remain very flexible for crypto owners. Some platforms have made the process easier by not keeping any minimum monthly payments. You can repay the full amount at maturity.
You can closely follow the movements of your funds thanks to the transparency offered by blockchain technology. Although personal details are not revealed on the blockchain, every movement of the transaction can be tracked. In the event of negligence, the details will be available for inspection as they are immutable.
Crypto loan use case
The best way to erase the concept of crypto ready is to understand how the market and platforms work.
- Unique asset lending platform
The easiest way to enter the market is to lend. Before going any further, compare prices between platforms using trackers. The readily available interest rate tools will find the optimum return for the assets you are willing to lend. Decentralized platforms offer high interest rates for stablecoins (7% -15%), while cryptos like Ethereum and Bitcoin earn lower rates (0% -1%). On centralized platforms, rates are mixed, allowing crypto assets to earn between 2% and 6%.
- Non-taxable liquidity
Investors often buy cryptocurrencies to diversify their portfolios. But selling them to raise money becomes a taxable event. When you need money, use crypto assets as collateral for fiat loans instead of selling them to avoid such inconvenience. This way, you have the flexibility to liquidate the asset to cover emergency expenses while maintaining your investment exposure and avoiding tax on gains.
- Arbitrage trading
Arbitrage trading allows you to earn interest without owning cryptocurrency. It is an easy way to borrow crypto from one platform and lend it to another. For example, you can borrow Bitcoin at a variable rate of 0.50% on one platform and lend it at a higher rate of 5.50% on another platform to make an annual profit of 5%. However, the risk in arbitrage trading is that the rates can change invariably, thus eliminating your gains.
Another cool feature offered by only a few platforms is the ability to select your own loan and borrowing terms. You can specify the asset, the loan term and the interest rate. Besides crypto-stable and crypto-fiat borrowing options, crypto-crypto opens up additional opportunities. The advantage of customizing your criteria is that you can predict the performance of your interest rate arbitrage.
- Margin of negociation
Simply, Margin of negociation is a form of multiplied loan. If you want to invest in cryptocurrency, you can borrow capital from a leveraged exchange. This allows the trader to increase his capital which can be used for margin trading.
For example, you can use any cryptocurrency like Ethereum as collateral to borrow stablecoins (which are backed by dollars) and then sell the stablecoins to buy more Ethereum. During this period, if the price of Ethereum suddenly goes up, you only need to pay back the original price. Marginal profit is what you earn.
This type of trading involves high risk, and if the price of Ethereum falls instead of rising, the exchange will have the right to liquidate your collateral to pay the lenders.
- Flash loan
The flash loan simplifies the borrowing process by not asking for any collateral in return. Anyone can take out this loan and the processing only takes a few minutes. He completely decentralized the process of taking credit.
However, the reimbursement is a whole different story. The condition for borrowing money from a protocol is that you must repay the money in the same transaction block. Only then will the platform successfully close the loan. If you cannot return within this time, the original transaction will be canceled. Each transaction remains on the blockchain, allowing the network to go as far as it wants to reverse the initial transaction.
The future of crypto loans
Cryptocurrencies have a high status as collateral. They liquidate easily, and this is a key part of the crypto lending ecosystem. In the event of a default, the money can be quickly recovered. With the growth of the crypto industry, the lending ecosystem may change the perspective of the financial world.