Saturday, October 23, 2021

How Does Crypto Loan Work

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What Is A Crypto Credit Card

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

A crypto credit card is a credit card that lets you spend cryptocurrency as well as earn cryptocurrency rewards.

Cryptocurrencies are digital currencies that have become increasingly popular in recent years. The best-known is Bitcoin, which launched in 2009, but there are over 4,000 different currencies out there. These digital currencies can be spent, just as you would a U.S. dollar, but they can also be treated as investments. Cryptocurrencies are extremely volatile and often don’t have the same protections as money you keep in the bank.

Right now, there are no crypto rewards credit cards in the United States. However, a few will launch later this year. We can expect to see more as cryptocurrency becomes even more widespread.

Crypto Lending: Everything You Need To Know

Were here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey.Read moreWe develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide.We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right.Read less

While cryptocurrency is new, crypto lending is quite similar to traditional lending. With a cryptocurrency loan, a borrower typically offers up their cryptocurrency as collateral to the lender, who gives them cash or a stablecoin cryptocurrency thats tied to a traditional currency, and charges the borrower interest on the loan.

For most cryptocurrency loans, the lender isnt a bank, but another individual investor. That means an individual can either be a cryptocurrency borrower or lender. There are a number of popular lending platforms where people can lend money to cryptocurrency investors, hold their cryptocurrency digital assets as collateral, and create an income stream from the interest payments of the borrowers.

Illustration To Understand Crypto

Lets understand this with an example.

Suppose you own 10 bitcoins and would like to earn a steady passive income with your investments in Bitcoins. You can deposit these 10 Bitcoins in your crypto lending platforms wallet and receive monthly or weekly interest from it. The lending of Bitcoins offer interest rates in the range of 3%-7% however, they can also be as high as 17% for more stable assets such as stable coins like USD Coin, Binance USD, etc.

The interesting thing about crypto lending compared to other peer-to-peer lending is that the borrowers attach their cryptocurrency as collateral. Hence, in the non-repayment of loans, the investors can sell the cryptocurrency assets to cover the loss. Investment platforms generally ask to stake 25 to 50% of the loan in crypto and can usually recover most of the losses and avoid investors losing money.

Cryptocurrency financing allows you to borrow physical money required by the investor without selling their crypto in case of an emergency.

Crypto lending is always over collateralised, and hence it is more secure than other forms of lending like peer to peer lending.

Recommended Reading: How To Mine Cryptocurrency 2021

Risks Of Crypto Lending

Crypto lending generates several potential benefits for consumers, but comes with unique potential risks. As a result, users should acquaint themselves with these platforms before using them. The major risk vectors of which you should be aware of before engaging with decentralized lending platforms are as follows:

Liquidity Risk : Borrowers may be exposed to liquidity risk when utilizing centralized crypto lending platforms. For example, if their collateral falls below the value that keeps lenders whole, theyll need to supply more liquidity to the protocol, or lenders risk losing their original investment via liquidation.

Liquidity Risk : On DeFi platforms, the use of liquidity pools can result in interest rate volatility if a large amount of capital moves in or out of the system.

Technical Risk : Since DeFi crypto lending protocols utilize smart contracts, theres a risk that the code might be corrupt. As a result, hackers can exploit contract vulnerabilities to steal funds or crash the platform.

Taxation and Regulatory Risk : Whether consumers utilize a centralized or decentralized crypto lending platform, there can be taxation and regulatory risks. Because many decentralized platforms dont adhere to KYC, AML, or other regulatory protocols, an element of uncertainty remains evident in emergent decentralized lending practices.

Benefits Of Taking On A Crypto Loan

Binance Crypto Loans

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.

Also Check: How To Get Crypto Coins

A Crypto Loan Is A Secured Loan Backed By Your Digital Assets

An important element that fuels cryptocurrency lending is its desirable interest rates making people realize that they can earn higher returns on their crypto assets rather than just letting it sit idle in their wallets. How Crypto Lending Works? Obtaining a loan from the bank is completely ruled out because this is how does crypto loan work emergency and getting a loan from a bank takes days not to mention the interest that would be incurred on the loan.

The best solution? Using his crypto asset to borrow cryptocurrency from a cryptocurrency lending platform.

Traditional Lending Vs Crypto Lending

Traditional debt structures are rapidly evolving via crowdfunding and P2P systems, including blockchain platforms for crypto-denominated borrowing and lending.

Summary

Lending and borrowing are crucial components of the modern banking system. However, the rise of financial technology platforms has begun to disrupt this dynamic. Building on this innovation, blockchain technology now supports crypto-denominated borrowing and lending. Crypto lending platforms can be built on centralized or decentralized infrastructure architectural decisions that in part depend on each platforms specific approach to custody and interaction with regulatory protocols. Both centralized and decentralized platforms come with their own potential risks and benefits.

Contents

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Alternatives To Crypto Loans

As with any financial decision, it’s a good idea to research and compare several options before you settle on one. That’s especially the case with relatively risky decisions like using digital assets to secure a loan.

Here are some potential alternatives to consider:

  • Sell your crypto. If you don’t have enough crypto holdings to meet minimum loan requirements or you need more than you’re allowed to borrow, it may make sense to simply sell the digital assets you have to get the funds you want. Just keep in mind that there can be tax implications when you sell crypto.
  • Take out a personal loan. Personal loans can be more expensive than crypto loans, but the upside is that many are unsecured, and you’ll typically get a longer repayment period.
  • Apply for a 0% intro APR credit card. If you have good or excellent credit, you may be able to get approved for a credit card with an introductory 0% APR promotion. These deals allow you to make purchases and pay them off over 12, 15, 18 or even 20 months without interest. Just keep in mind that the card’s potentially high ongoing interest rate will apply to any balance left over after the introductory period ends.
  • Ask family or friends for help. Depending on your situation, you may be able to ask a family member or friend to help you with your financial issues. Be clear about the repayment agreement and make sure you stick to it to avoid damaging the relationship.

Manual Crypto Lending: Coinloan

Celsius Crypto Loan Review – How Does It Work? | UC Live #24 $CEL

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.

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Process Of Crypto Lending

The process of crypto lending is as follows:

  • The borrower connects with the crypto lending platform requesting a crypto loan.
  • The borrower offers crypto-assets as collateral for the loan. The crypto platform accepts the loan and attaches the collateral. The borrower will have to repay the entire loan before taking back the stakes in the collateral offered.
  • The lender funds the loan through the third party platform to the borrower.

Financial Technology And Peer

Although historically central banks have usually dictated benchmark interest rates, private lenders often compete with one another to win business. For example, the benchmark rate might be 1%, while personal loan rates fall between 1.5% to 3% at financial institutions. Banks and credit unions have historically been the primary source of consumer credit. However, this dynamic has been shifting as crowdfunding and peer-to-peer lending platforms like Kickstarter and LendingClub experience widespread adoption. Financial technology and open finance platforms like these can help make financial services more accessible and convenient to the general public. At the same time, these solutions are generally still integrated with the traditional banking system and utilize its centralized infrastructure.

Recommended Reading: How To Buy Bitcoin In New York

How To Use Youhodler

Using the YouHodler platform offers a hassle-free experience. The user can find whatever they want to know about the cryptocurrency investment and the ownership of cryptos. They can use this platform to make the most out of their crypto assets.

One of the simple and efficient tools offered by the platform is the YouHodler wallet. It allows the users to hold their cryptocurrencies for investment purposes they can also convert their fiat or crypto assets and store them in the wallet.

Using the YouHodler crypto-to-fiat wallet, the user can manage their funds, get loans, and start crypto savings account with this platform.

Youhodler Crypto Wallet App

Crypto Loans  How Do They Work?

YouHodler provides a wallet app where the user can exchange, store, and spend 18 cryptocurrencies and 7 stablecoins. It also offers crypto rewards, crypto loans integrated and staking. The wallet app is available in the Google play store and Apple app store. In this way, it makes it easier for the users to manage their crypto portfolios on the go.

Read Also: How To Trade Crypto For Usd

What If I Dont Have Cryptos

We understand if youre not keen on cryptocurrency. Perhaps you dont like how often the prices change. Maybe you want to use other assets as collateral. Or you simply dont 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 .

Its 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.

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.

Recommended Reading: Is Cryptocurrency Legal In Us

Concept Of Decentralized Finance Lending

The entire concept of lending on DeFi platforms is similar to that on CeFi , except for one thing. In DeFi, there is no presence of a centralized authority. All the transactions on decentralized platforms are handled through code written in smart contracts.

All the protocols are accessible to anyone as they are put up on the blockchain, where everything is transparent. There is no need to go through any verification process on DeFi platforms, and even the interest rates will be less than the CeFi platforms.

The process here is pretty simple. On a DeFi platform, you only need to apply for the crypto loan and provide the required cryptocurrency as collateral. Now, smart contracts will take care of the transaction, and you will receive the loan amount. You can get a loan of any size from decentralized platforms.

There is no need to worry even if you are on the lenders side on a decentralized platform. The smart contracts make sure that the loan repayment is made.

Unless You’re A Seasoned Crypto Trader Steer Clear Of Defi Platforms

How To Take a Crypto Loan on Nexo – Tutorial

If your bank fails, the government will restore what you’ve lost — up to $100,000 per account. But on DeFi platforms, if you lose all your assets in some unexpected way, you don’t have any third party to hold accountable.

Users can lend or borrow digital currency either through DeFi platforms, like Compound or Aave, or through centralized finance networks like Celsius. All DeFi lending services track their transactions with a blockchain there is no traditional bank or other central authority involved. While it’s nice not having to trust a third party with your assets, DeFi protocols are subject to technical errors and hackers.

However, on every CeFi network, the people running the company act as the central authority. Therefore, as a lender, you really need to trust that whoever controls the platform will always act in good faith. Make sure any CeFi platform you research has a recovery system in place, like a custody firm that safeguards your money, just in case your assets become compromised or lost.

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Defi Lending Vs Traditional Lending

The underlying technology for defi lending is Blockchain Defi utilizes all its unique features and performs exceptionally well compared to traditional lending. Defi lending offers complete transparency with easier access to assets for every money transfer process without involving any third-party. It provides the most straightforward borrowing process the borrower needs to create an account on the Defi platform, have a crypto wallet and open Smart contracts. Defi offers a censorship-free environment, meaning there is no preferential treatment while ensuring immutability.

Defi lending benefits both lenders and borrowers. It offers margin trading options, allows long-term investors to lend assets and earn higher interest rates. It will also enable users to access fiat currency credit to borrow loans at lower rates than decentralized exchanges. Moreover, the users can sell it on a centralized exchange for a cryptocurrency and then finally lend it to decentralized exchanges.

What Is A Crypto Loan

As we said, it involves borrowing money with cryptocurrency as collateral. Its just like when you get an auto loan or house loan. You cant get them from a bank, though.

Theyre available at DeFi platforms or crypto exchanges. Unlike regular loans or credit cards, they wont need your . Instead, they will only check your loan-to-value 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.

Lets say you have some bitcoin, and you need cash for around $90,000. At the time of writing, the bitcoin price is $46,354.18. This means youll 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 collaterals 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, its great if your crypto asset goes up in value. In turn, your collaterals value goes up. You may take out more cash against the added value or leave the loan with profit!

Also Check: How Much Money To Day Trade Crypto

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