What do you do with fiat money that you temporarily don’t need? Store in packs under the mattress? Hardly. We are used to making fiat money work – for example, depositing. The bank uses these funds to issue cryptocurrency loans and shares the profit with you in the form of interest.
What about cryptocurrency? After all, many go to the crypt in the expectation that the rate will rise “to the moon”. But the digital currency in a blockchain wallet is like a wad of cash in a safe. They are safe, but they don’t work or generate income.
Cryptocurrency Loans: How Much They Cost, Where to get them, and how to make money on them?
Instead of storing cryptocurrency in your wallet, you can lend it and receive passive income. And vice versa: if you need fiat, they can be obtained on the security of your cryptocurrency. Are these loans safe and which platform to choose – read the review.
Crypto loans are a logical solution. Instead of going crypto, you can issue loans secured by another digital asset and receive up to 10% per year. From the point of view of the borrower, this is also very convenient: there is no need to collect dozens of documents and wait for the results of a bank check.
Looks very attractive, doesn’t it? But in reality, not everything is so simple.
Collateral system and LTV
Banks use complex algorithms for assessing the borrower’s solvency. To do this, they require a large number of documents – for example, a certificate of income and a certificate of ownership of an apartment. The more guarantees, the lower the rate can be.
Crypto lending platforms do not have such valuation mechanisms. How to protect the interests of the lender in case the borrower does not pay?
The answer is collateral and in an amount exceeding the size of the loan itself. For this, the LTV (loan to value) coefficient is used – the share of the loan in the value of the collateral. For example, if you post collateral of $ 100 and receive a loan of $ 50 against it, then LTV = 50%. The LTV level can be different depending on the volatility risk of a particular currency.
If the rate of the collateral currency suddenly goes down (or the rate of the loan currency rises), then LTV will decrease. In this case, the collateral can be liquidated, that is, sold on a crypto exchange. The same will happen if the borrower fails to pay interest or the body of the loan. That is, the creditor will definitely get his money back.
The money-back-guarantee is a big advantage for lenders over conventional loans. Another plus is the high-interest income, which can exceed 10% per year.
Who needs loans in cryptocurrency?
Crypto loans are useful primarily for traders. Without selling their own assets, they can get additional funds for margin trading, short play, and arbitrage.
The second segment of the audience is small businesses, especially blockchain startups. They often prefer to make collateral in crypto and take a loan in dollars, which is possible on a number of platforms (see below). For corporate clients, such crypto loans are attracted primarily by their simplicity.
Should you choose a centralized platform or DeFi?
Crypto loan platforms can be divided into two groups:
1) Centralized – they function like ordinary credit organizations, have licenses, and issue loans after the approval of the application. The collateral is placed in cold storage facilities of custodian services like Gemini Custody. In terms of speed, convenience, and security, such sites can be compared to large processing providers such as Cryptoprocessing.com or centralized exchanges like Binance.
2) Decentralized – refers to the infrastructure DeFi (decentralized finance). Collateral is stored on smart contracts, all transactions are performed on the blockchain. Although each platform has an interface (application), if desired, you can conduct transactions directly through a smart contract. Information about market prices comes automatically through the so-called oracles. In general, such platforms are more difficult for the user, although they are more in line with the blockchain ideology.
Should you try it?
The crypto loan industry is growing at a tremendous speed, and there are already more than a dozen services on the market. However, keep in mind that the profitability of different cryptocurrencies varies greatly. The highest rates are for stable coins.
You also need to understand that decentralized platforms (DeFi) are built on the Ethereumblockchain, and you cannot invest BTC directly on them. Even where there is an option to “roll up” bitcoins into an asset like WBTC, the rate will be very low. For example, in Compound, it is only 0.67%. On centralized sites, income from MTC is higher – an average of 3%.
So, the choice of the platform largely depends on what kind of cryptocurrency you have. If this is MTC, then centralized sites are suitable for you.
Another factor is the level of technical expertise. The interfaces of decentralized applications leave a lot to be desired and can be difficult for newbies to use. On the other hand, this is a great opportunity to learn how smart contracts, oracles, etc. work.
Crypto deposit rates are higher than in a bank, and risks are lower than on conventional P2P lending platforms. Therefore, if you are interested in innovative ways of passive income, then crypto loans are definitely worth taking a closer look at.
So, loans secured by cryptocurrency offer the following benefits for borrowers:
- The loan is processed online and very quickly, no need to sit in queues at the bank.
- Almost 100% approval – the client’s solvency is confirmed not by checking the credit history, but by the availability of the required amount of collateral. The only thing is that the collateral must be more than the loan, often even twice.
- In most cases, a free repayment schedule or even an extension of the contract, subject to the accrual of additional interest. No penalties for early repayment.
- Fast receipt of fiat money on your card, bank account, electronic wallet.
- Savings on exchange transactions. When selling cryptocurrency, up to 14% of funds can be spent on commissions. It is unwise to spend such an amount of funds in case you are not going to exit the asset forever.
- If the cryptocurrency grows during the loan, the client remains even in the black when he returns his collateral.
- The conditions offered by the sites are becoming more flexible and loyal, thanks to the growing competition.
- There are platforms that accept not only Bitcoin as collateral, but also other cryptocurrencies, as well as stable coins. In addition, many services issue loans in cryptocurrency, which is also convenient in certain cases.
- You need to mortgage cryptocurrency, not an apartment or other property. It’s less risky anyway.
It is always important for a trader to have the maximum possible turnover of funds, this has a positive effect on his earnings. Therefore, traders often invest in ICO projects, mining, new coins. Loans backed by cryptocurrency assets make these processes more profitable and secure.
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