Cryptocurrency lending and borrowing: Would you believe it if someone told that you could borrow a loan at an affordable rate between 5-15% and no need for documentation, processing fees, collateral or collateral (e.g. your car or house)?
If you have some cryptos stored in your digital wallet, it is now possible.
Cryptocurrency lending and borrowing
With a multifold increase in investor count, cryptocurrency has gained enormous popularity over the past year.
In the short-term, many virtual currencies are volatile. Bitcoin’s value doubled during the first quarter of 2021 but then fell to $17,021 in July 2021. Bitcoin’s price climbed to $24,000 in December 2020. This is an increase of 224% over a year. It touched $40,000 in January 2021. This was higher than the record $64,000 set in April 2021. It has been falling since July 21. The price traded at approximately $46,000 in September 2021.
Investors who have invested in this volatile market may have lost or gained money. While some investors only seek short-term profits, others invest because they believe in cryptocurrency’s future.
Investors who want to remain invested in cryptocurrencies can spend physical currencies, such as INR, USD and CAD while still holding their cryptocurrencies. It is possible now with crypto lending. Crypto investors have the option to hold their crypto-assets in safe wallets until their investment appreciations.
The new financial era has seen crypto borrowing and lending gain momentum. Let’s learn more about crypto financing.
What is cryptocurrency borrowing and lending?
Crypto-financing permits crypto investors to obtain loans in cryptocurrency or cash. They can offer cryptocurrencies they own as collateral. Crypto lending allows the lender to retain ownership of the crypto asset. The collateral crypto cannot be used to trade or transact during the loan tenure.
Investors in crypto can borrow crypto assets to earn interest. Also known as crypto dividends, the interest earned is called “crypto dividends”. It is a simple way that crypto investors can generate passive income through lending their crypto assets.
A crypto loan is a loan secured by cryptocurrency. It can be obtained through a crypto exchange, or any crypto-lending portal. A crypto loan works in the same manner as a mortgage, car loan or mortgage except that you can use your property or car to secure your funds.
Illustrations to help you understand crypto-lending
Let’s take an example to help us understand.
Imagine you have 10 Bitcoins and want to earn a stable passive income with your Bitcoin investments. You can deposit the 10 Bitcoins into your crypto lending platforms wallet to get monthly or weekly income. You can borrow Bitcoins at interest rates ranging from 3% to 7%, but they can also go as high as 17% for stable assets like USD Coin and Binance USD.
One of the most interesting aspects about crypto lending, compared to peer-to–peer lending, is that the borrowers attach cryptocurrency as collateral. To cover the loss, investors have the option to sell their crypto assets if the loans are not paid back. Investment platforms usually ask for 25 to 50 percent of the loan in crypto. This allows them to recover the majority of losses and save investors money.
Cryptocurrency financing lets you borrow physical money (e.g. The investor can obtain the currency (CAD, EUR or USD) they require without having to sell their crypto.
Let’s try another example.
Mr. A has USD 15,000 worth of Bitcoins and needs a USD 5,000 loan to cover it at an annual 8% interest rate. Mr. B has USD 5,000 of stable coins and is available to lend it out to Mr. A at an 8.8% interest rate, keeping 1 Bitcoin as collateral. Mr. A will receive the Bitcoin once Mr. B has paid the USD 5,000 and interest. This transaction has an LTV (3loan to value), of USD 5,000/USD 15,,000. If Mr. A doesn’t repay the loan amount, Mr.B can liquidate the Bitcoin and refund the remainder amount.
Crypto lending is always secured and is therefore more secure than other types of lending such as peer to peer lending.
How does crypto lending operate?
Borrowers and lenders in cryptocurrency financing are linked by a third party, which is often an online crypto lending platform. To make crypto-loans, there must be three parties involved namely lenders, borrowers (crypto assets holders), as well as lending platforms.
- These are the lenders who are looking to lend cryptos, cash or stablecoins and make passive income from their crypto investments.
- Third-party platforms for crypto lending connect borrowers to lenders and handle these transactions. These platforms may be decentralized, autonomous, or centralised (a group of companies or individuals operating the platform).
- Borrowers need money for a variety purposes. They should use crypto or fiat asset collateral to obtain funding.
This is the process of crypto lending:
- The borrower requests a crypto-loan from the crypto lending platform.
- The borrower offers cryptocurrency-assets to be collateral for the loan. The crypto platform accepts the loan, and attaches the collateral. The borrower must repay the entire loan amount before they can take back the collateral.
- The third party platform that the lender uses to finance the loan is the one used by the lender.
Different types of crypto-lending platforms
Two types are available for lending platforms.
- You will receive dividends from automated platforms as soon as assets are deposited in your crypto wallet.
- Manual platformsrequire investors to manually stake (block a specific amount for a time) a specified amount of your crypto assets in order generate dividends.