Getting loans with cryptocurrency can often be less complicated than getting traditional bank loans — what exactly are crypto loans?
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Crypto Lending Explained
Crypto enthusiasts are often encouraged to “HODL” their assets — keeping them safe in a wallet until the price of their chosen currency appreciates. But just like you’d feel uneasy about leaving your cash sitting around in a bank with a low interest rates, a common question is this: how can you get your digital currency to grow?
This is where crypto lending comes in. Not only can it enable savers to receive interest on their stash of Bitcoin, but it enables borrowers to unlock the value of their digital assets by using it as collateral for a loan.
When investing, one of the biggest challenges can be cashflow — and there’s nothing worse than having to raid the capital you’ve got tied up in assets for short-term costs and lack liquidity.
Let’s imagine that Steve has 2 BTC. He doesn’t want to sell any of it because he’s confident that prices are going to appreciate substantially. Steve’s also worried that, if he does end up offloading his crypto, there’ll be a risk that he ends up with less Bitcoin when he buys it back at a later date.
Crypto lending platforms can come to the rescue here. Typically, Steve will be given the opportunity to use his Bitcoin as collateral — and receive a loan in stablecoins. Owing to the volatility of digital assets, he’ll normally have to “overcollateralize,” meaning he’ll have to lock up more BTC than the overall value of the funds he’s receiving.
Once he’s repaid back the loan, plus interest, his crypto will be returned in full — and he’ll make a handsome profit if BTC ended up appreciating as he predicted. His crypto would only be at risk if he failed to keep up with the loan’s terms, or if the value of the Bitcoin held as collateral fell below the value of the loan he received.
How Did Crypto Loans Start?
Benefits of Taking on a Crypto Loan
One of the major bonuses many see in a crypto loan is that, unlike traditional banking, you won’t be subject to your credit score being assessed. This means that lending is more accessible to people who don’t have a financial history, underbanked consumers who don’t have a bank account and self-employed workers who struggle to access credit because their fluctuating earnings don’t meet a bank’s 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. You’ll 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.
How to Get a Bitcoin Loan
If you like the sound of a BTC loan but you’re not sure where to begin, you have two main options — centralized and decentralized lending platforms.
Crypto Loan on Centralized Exchanges
Centralized ecosystems such as BlockFi, Nexo and Binance have to follow certain rules and procedures to be compliant. You’ll have to create an account by signing up for your chosen platform and go through Know Your Customer (KYC) procedures that are in place to prevent fraud and money laundering.
There’s more paperwork involved in getting a loan through a CeFi platform, but the fact that there’s a regulated environment — and a customer service representative who’s just a click or a phone call away — could make these platforms more appealing to traditional investors.
Crypto Loan on Binance
Loan terms are 7, 14, 30, 90 and 180 days, and interest is calculated hourly. Binance users can choose to repay the loan in advance, however interest will be rounded off to the nearest hour. As of Sept. 9, 2021, the hourly interest rate is 0.001667%, and accumulates on the hour once the user successfully borrows the crypto asset.
Crypto Loan on BlockFi
However, BlockFi crypto loans have higher requirements compared to Binance. For starters, the minimum loan amount is USD $10,000. Also, LTV is lower, i.e. more stringent, at 50% and margin call at 70%. However, BlockFi users will be able to receive their loan funds on the same business day, and they are able to repay the loan in advance, similar to Binance.
Is BlockFi Safe?
BlockFi's primary custodian is Gemini Trust Company LLC, a company regulated by the New York State Department of Financial Services. It is also backed by notable institutional investors, such as Galaxy Digital, Fidelity, SoFi and Coinbase Ventures. However, crypto accounts on BlockFi are not FDIC or SIPC protected. Additionally, three US states — New Jersey, Alabama and Texas — have banned BlockFi interest accounts, citing that it violates the state's securities law. While this does not affect BlockFi crypto loan product directly, it may negatively impact users access to BlockFi.
Crypto Loans Without Collateral
The second option for crypto lending would be to go via a decentralized platform, known as DeFi for short.
Before moving forward on any crypto loans without collateral, be sure to do your own research and make sure that the platform is legitimate.
What Is Decentralized Finance (DeFi) Lending?
Anyone can access the protocols on a decentralized finance platform, which makes them completely transparent, as nothing can be hidden on the blockchain. Unlike CeFi platforms, there’s no middleman or financial regulator, which means you don’t have to go through a verification process like KYC. However, DeFi interest rates for crypto lending often pale in comparison to what centralized rivals can provide.
Getting a BTC or ETH loan — or any other type of crypto loans on a DeFi platform — is very quick as you won’t need to pass any kind of due diligence. Thanks to smart contracts, all a user will need to do is apply for the loan and then send the crypto they want to use as collateral to a specified wallet associated with the lending platform.
Should You Get a Crypto Loan?
On many centralized and decentralized lending platforms, you’ll have the option to open up a savings account using your crypto, as well as trade tokens or take out loans.
With both types of lending platforms still in their early stages, it’s clear that this is an exciting space to watch. There’s a lot of room for growth, and the potential to access borrowing without the usual formalities could be a game changer for both the people and the financial services industry.