Tuesday, June 28, 2022

How Do Crypto Loans Work

How Do The Crypto Loans Without Collateral Work

What Is Crypto Lending and How Does It Work?

Another option is to go through a decentralized platform for crypto lending. Crypto loans without collateral are also known as Unsecured crypto loans. The borrower can have short-term liquidity and pay back the loan amount in cryptocurrency or fiat currency.

Here, the idea is to borrow the loan amount directly from a lender by keeping cryptocurrency as collateral instead of staking other assets like properties or gold on stake. Flash loans are currently the most popular unsecured loans on the DeFi space, where you dont have to stake anything for collateral. The only thing you need to be careful about is having enough knowledge about crypto and DeFi before taking up a flash loan.

Flash loans are instant ones that are controlled directly by smart contracts. You should perform thorough research before you move towards any unsecured loan.

Put Crypto Down As Collateral And Borrow Fiat

Crypto loans and lending platforms have emerged during 2020. Simply put, crypto loan platforms allow users to put their crypto down as collateral and borrow fiat.

The Interest rates for cryptocurrencies are set to incentivize users to loan out their crypto assets. Why? Because users can earn a higher return on lending assets than they can by storing them. Crypto loans can also let an investor add liquidity to their bank account without triggering a taxable event.

Within this article, we will look deeper at crypto loans for borrowers and the advantages and possible pitfalls.

Why Should I Consider A Crypto Loan

The majority of crypto holders have a long-term view of their investments. Most have no intention to sell but although they plan to hold their crypto assets, sometimes circumstances will force investors to sell their crypto for fiat currency.

But given the underlying investment strategy, rather than selling, crypto loans allow investors to use their cryptocurrencies as collateral towards a cryptocurrency backed loan. This allows them to maintain ownership of their funds while gaining access to the FIAT currency they need.

In other words, they are using the asset they have to release money that can be utilized for everyday things and more significant life purchases.

Recommended Reading: What Are The Top 5 Cryptocurrencies

The Drawbacks Of A Crypto Loan

While there are some key benefits that could appeal to certain consumers, there are a lot of downsides to consider as well:

  • Minimum borrowing requirements can be high. While platforms can vary, you may simply not have enough holdings to secure the minimum loan amount the lender offers. With BlockFi, for instance, the minimum loan amount is $10,000, and with a 50% maximum loan-to-value ratio, that means you need $20,000 or more in holdings to get approved.
  • Repayment terms are short. Crypto loans typically have terms of 12 month or less, which means you don’t have a lot of time to repay them, especially compared with personal loans, which can offer longer terms. If you default on the debt, the platform may liquidate your holdings, which could result in a tax bill if your portfolio has gained in value since you first bought the digital assets.
  • A margin call occurs when the value of your collateral assets drops below a threshold set by the lender. If the price of your crypto assets drops significantlywhich is more likely with crypto versus traditional assets due to the volatility of the crypto marketyou may need to deposit more into your account to keep your assets. If you don’t, the platform may choose to sell your holdings, which could affect your tax liability.
  • Assets are inaccessible. As long as your loan is outstanding, you can’t use or trade your crypto assets. In other words, if the price of your assets tanks, you’re stuck, and there’s no insurance against the loss.

Benefits Of Taking On A Crypto Loan

How to lend your crypto for interest online

One of the major bonuses many see in a crypto loan is that, unlike traditional banking, you wont be subject to your credit score being assessed. This means that lending is more accessible to people who dont have a financial history, underbanked consumers who dont have a bank account and self-employed workers who struggle to access credit because their fluctuating earnings dont meet a banks strict lending criteria. Repayments can also be more flexible.

And whereas it can take several days for loans to clear in the old-fashioned financial world, BTC loans can be practically instant. Youll also be able to make your assets liquid without triggering a taxable event and you can adjust the loan to suit your needs. Users can also switch between crypto assets, so you could deposit Ether and borrow Tether, all on the same platform.

Recommended Reading: How Much Is 10000 Bitcoin Worth

Alternatives To Borrowing Against Your Crypto

If you have equity in your home: With a home equity line of credit, you can potentially borrow up to 85% of your homes value. Be careful, though, as you can lose your home if you dont repay.

If youre looking for a lower interest rate: A 0%-interest credit card can offer free financing for 14 to 18 months. However, note that after the introductory period, you could pay a high interest rate on unpaid balances.

If you have bad credit: Credit union loans typically have flexible rates and terms. They also consider your history as a member, which means they may have softer requirements.

If you need a small loan: A small personal loan below $2,000 is also a viable option. However, rates may be high depending on your credit profile and income.

About the author:Chanell Alexander writes about personal loan topics for NerdWallet. Read more

Is Crypto Lending Profitable

You could earn up to 10% interest from lending crypto. Note that you cant 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 authors research or own personal experience.

Also Check: Should I Invest In Hive Blockchain

Is Crypto Lending Safe

Crypto lending is as safe as any other crypto transaction.

There are certain risks that are associated with loans in general and ones that are unique for crypto loans in particular. The platform that you use could always turn out to be a scam, or it can be hacked these two threats are almost always hanging over users heads. To minimize the chances of you being scammed or of your funds being stolen, use reliable crypto loan services, check whether youre using the platforms genuine website, etc.

As for the risks that are unique to crypto loans, well, theyre a bit harder to avoid. Perhaps the biggest one is that unlike traditional financial services, crypto companies are not required by law to maintain a certain level of liquidity. Considering how volatile the crypto market is, this poses a great risk to people that deposit their money to those platforms. This is why we recommend looking for platforms that offer insurance. Margin calls are another risk that is rather unique to the crypto world, as traditional collateral is much less likely to plummet than crypto.

Types Of Lending Platforms: Centralized Vs Decentralized

How does crypto lending work? | Crypto Lending | Chapter 3

Since 2018, a number of lending platforms have cropped up within the crypto industry and can generally be grouped into centralized and decentralized platforms. At the core of the distinction is essentially who or what is handling the lending and borrowing process & mdash a business or a protocol.

Centralized lending platforms act more like traditional fintech companies that happen to work with cryptocurrency & mdash & nbsp they follow Know Your Customer processes, have a custodial system to protect your assets, and can form traditional business partnerships with institutions, such as negotiating specific loan agreements. These platforms tend to offer interest rates determined by the company, which often include notably higher returns for lenders of crypto assets like Ether and Bitcoin than their decentralized counterparts.

Also Check: How To Buy Bitcoin In Russia

Automated Crypto Lending: Celciusnetwork

If you decide to invest with a crypto lending platform like Cesius.Network, then the lending process will be fully automated.

Basically, you just need to transfer your coins to the wallet that they provide and you will automatically earn dividends on your cryptocurrencies based on the coin you deposited. Each cryptocurrency has a different yield with stablecoins having yields usually from 10% to 18% per year and crypto coins from 3 to 8% per year.

In the image below of the Celsius.Network youll see that next to the name of each deposited crypto you can see a green number indicating the automatic yearly yield

Figure: Celsius.Network Crypto lending App

If you would like to try using this crypto lending platform you can use the button below to earn a $50 bonus when opening your account and holding $400 for 30 days in the wallet.

If you are on a desktop computer, you can use the promo code 115185f01c

Benefits Of Crypto Loans

The following are the benefits of crypto loans.

  • Crypto loans do not involve credit score assessment. Either you have no or poor credit score, you can get a crypto loan.
  • Crypto lending is more accessible for the unbanked community.
  • The time to pay back the loan is flexible.
  • Unlike traditional loans, you can instantly get a crypto loan.
  • You also have a choice to switch between crypto assets.

Also Check: How To Get Free Cryptocurrency

Can You Lend Bitcoin

To give a straightforward answer, Yes! you can lend a bitcoin. Much more like the conventional style of asking a friend to lend you money, an individual loans bitcoin for an agreed interest rate. Except for this time, there are platforms to carry out such activity.

You can always get a loan in Bitcoin without going through a platform by visiting online forums and dealing directly with individual dealers. You may not have to pay a market place charge, so its far riskier for both lending and borrowing activities.

That is because its much difficult to check someones identity on a forum market place. So if anything went wrong, you do not have the legal means to have your money back.

Forums are better reserved for seasoned bitcoin traders who have a good understanding of how to detect fraud. Another tip would be that, should you want to loan bitcoin to a friend, you might as well get familiar with the platform.

Manual Crypto Lending: Coinloan

What is a Crypto Loan and How Does it Work ...

I found it would be also interesting to give you another example but will a platform that allows you to manually lend your crypto to the loans you want. With this second example, I believe it will be easier to understand the fundamental process of crypto lending.

The case study below is about the crypto lending platform CoinLoan.

Figure: Cryptocurrency Lending Case Study CoinLoan

From the above figure, borrowers can set their loan requirements and then post them to the platforms marketplace, and if an investor is interested in the loan terms can accept them straightaway.

As an investor, you can click Loan Requests at the right to see a variety of loan options available for you to invest. This is the marketplace section, though different platforms have a different format, it is basically where loan requirements from borrowers are displayed live.

After a borrower has posted his or her requirements, you can back it directly if you like the look of the financing request.

Remember that crypto lending is just like p2p lending, and once you have backed a loan, the repayment procedure will be similar.

You will receive monthly repayments depending on whether you choose Principle + Interest or Interest-Only.

Once again, this will vary from one platform to another, but the general core concept is the same.

Also Check: How To Calculate Market Cap Crypto

Crypto Loan Limits And Rates

Cryptocurrency loans are operating on the cutting edge of decentralized finance. Owing to this, there are a wide variety of loan limits, rates, and terms that depend on the company you work with.

Though the companies and platforms vary greatly in terms of user-friendliness, assets accepted, and loan terms offered, a few characteristics are pretty standard across the emerging industry.

For instance, interest rates generally start at 8% and arent dictated by your credit score. Because youre collateralizing crypto assets to qualify for the loan, your credit score doesnt factor inwhich is excellent news for many would-be borrowers.

Generally speaking, youll get the best interest rate the shorter your loan term is. Choosing a short-term loan can net you an interest rate as low as 3% whereas longer-term loans will charge higher interest rates.

Minimum loan amounts range from $50 to $1,000 or so and max out anywhere between $1 million and $25 million, depending on the lender.

What If The Value Of My Collateral Changes Before I Repay My Credit Line

If your collateral’s value increases, your credit line limit also goes up. Youre free to withdraw more or leave your current credit line as is.

You can also use the extra value of your crypto to pay off part of your loan. If your assets have met your price target, then you can:

  • Place an order in your Nexo Wallet to sell a fraction of the crypto assets in your account.
  • Repay part or all of your outstanding balance.

The transaction is performed without any additional fees on Nexos part. Any resulting charges are fees from the exchange that facilitated the trade.

If your collateralized assets decrease in value your loan-to-value ratio will rise. You will receive a minimum of three margin calls when the LTV increases to 71.4%, 74.1%, and 76.9%.

If the value of your collateral continues to drop and your LTV reaches the 83.33% mark, the Nexo blockchain oracle may initiate partial automatic loan repayments to rebalance the loan-to-value ratio back within limits. The blockchain oracle will sell as little as possible, so you retain as much of your crypto as possible.

To avoid this scenario, top up more assets and enable our Automatic Collateral Transfer feature, allowing the Nexo blockchain oracle to automatically transfer a small portion of your assets from the Savings Wallet to the Credit Line Wallet, thus keeping your credit line health in check.

Also Check: How Do I Buy Safemoon Crypto

No Credit History Check

One huge benefit of crypto loans is the lack of a credit check. You dont need to painstakingly build up a credit score for your whole life to take out a crypto loan, and you dont need to worry about not receiving one because you didnt pay your credit card debt once due to some unforeseen circumstances.

Having no credit check makes crypto loans a lot more democratic than traditional ones.

What Is A Crypto Loan And How Does It Work

Crypto Loan: How to Get an Instant Crypto Loan on YouHodler (OLD VIDEO)

Throughout the ages, loans have taken on many different forms, but the concept has remained the same. Dating as far back as classical Greece, the practice of lending has deep roots.

Today, however, we are a long way from the era of Zeus and Athena, and our oracles no longer hail from the Temple of Apollo, but from the codebase of Chainlink. As such, the way we loan money has changed significantly, too. Whereas people used to measure loans in silver talents, we are beginning to collateralize them with digital assets like Bitcoin, Ethereum, and Litecoin.

The term loan tends to put people off because there are too many connotations associated with it. At its most basic, a loan is nothing more than one entity lending money to another.

In recent history, loans have become a popular way to receive an advance of government-backed fiat currencies like USD, GBP, EUR, and JPY. With the advent of Bitcoin and blockchain technology, the nature of loans is changingand fast.

Cryptocurrency loans are becoming increasingly common as the number of people investing in them also rises. To take advantage of this trend, youll need to get up to speed on what a cryptocurrency loan is, as well as how they work.

Recommended Reading: Is It Right Time To Buy Bitcoin

Do Not Sell Your Crypto

It gets hard sometimes. During such moments, tough decisions have to be made, and one may be to sell your coins. No matter how bad the situation is, do not sell your coins. Strive to get back the borrowed assets, but do not let go of your coins. Why is this necessary?

The borrowed assets have a certain price tag. That price may or may not appreciate. Even if the value rises, the new worth wont fall far from the original price. Now, whenever a loan is issued, an interest is to be paid by the borrower. This interest cancels any gain in the value of the asset you borrowed on your side. Although this is double to the lender

These gains and losses cannot under whatever circumstances match the value of your crypto property. That is why you should never let go of your crypto. The potential these assets hold cannot be compared to any other asset. Fight for them and keep them like theyre your life. Youd rather struggle to pay the loans you owe and retain your crypto placed as collateral.

Advantages Of Bitcoin Loans

Before anything, let us first understand the advantages that Bitcoin loans offer.

Ease of getting

It goes without saying that getting a Bitcoin loan is comparatively easier than a standard bank loan. When you go for traditional loans, they will check your credit score. If your documents do not fulfill their conditions, it is unlikely you will get the loan. But to avail of a Bitcoin loan, your credit score is not essential.

In fact, you do not even need a bank account to receive the amount. People get funds that they can use for further work. To know more, you can visit coinlive.io and get all your doubts clarified.

Quick process

Most banks take a reasonable amount of time before they process your loan. This is primarily because they require lots of paperwork formality finished and then only, they transfer the money.

However, with Bitcoin loans, you get the cash within 24 hours. So, if you are looking for money for an emergency, Bitcoin loans are the better option.

Flexibility in loan terms

When it comes to payment terms, Bitcoin loans are flexible in comparison to traditional lending. The borrower decides the duration of the loan, loan to value ratio, and the currency they want to be paid in.

The loan amount is the only factor that is determined by the collateral you provide. Some loan providers also offer flexible repayment options, so you do not have to worry about that aspect too.

Explaining Bitcoin loans

How you can get a Bitcoin loan

ยท Centralized lending platform

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