What is crypto lending and how does it work?

Crypto lending is similar to a traditional lending model in that users can borrow and lend cryptocurrencies in exchange for a fee or interest. However, these loans use digital currencies as collateral, similar to a security-based loan.

The basic principle works like a mortgage loan or car loan: you pledge your crypto assets to obtain the loan and pay it off over time. You can get this type of loan through a crypto exchange or crypto lending platform. Although interest in cryptocurrencies has increased dramatically in recent years, lending cryptocurrencies comes with its own risks and is highly volatile, especially in the short term.

How crypto loans work

Crypto lending allows you to borrow money – in cash or cryptocurrency – for a fee, usually between 5 and 10 percent. It is essentially a secured personal loan.

While you retain ownership of the crypto you used as collateral, you lose some rights, such as the ability to trade it or use it to make transactions. Additionally, if the value of your digital assets drops significantly, you may have to pay back much more than you borrowed if you are unable to pay off the loan.

People may consider crypto loans because of the benefits they offer and because they do not plan to trade or use their crypto assets in the near future. The acronym HODL, which stands for hold on for dear life, is a common refrain on crypto-focused online forums.

Potential Benefits of Cryptocurrency Loans

Although crypto lending comes with a lot of risk, there are some benefits. However, the examples below should be taken into account, in addition to the inherent disadvantages and volatility.

• Low interest: While generally not as cheap as mortgage or car loans, crypto loans are a low-cost alternative to personal loans and credit cards. You can often get a crypto loan with an interest rate below 10 percent.
• No credit check: Crypto lending platforms and exchanges typically don’t run a credit check when you sign up, making it an incredibly attractive financing option for those with bad credit or no credit history.
• Fast financing: Once you are approved, you can receive your loan within a few hours.

Why not consider cryptocurrency loans?

Due to the nature of cryptocurrency, there are usually more reasons not to use this method of borrowing than there are benefits.

Margin calls

A margin call occurs when the value of your collateral falls below a certain threshold and the lender requires you to increase your holdings to maintain the loan. In some cases, the lender may even sell some of your assets to lower your loan-to-value ratio. Because cryptocurrencies are extremely volatile in the short term, the chance of this happening is high.

No access to your belongings

As long as your loan has an outstanding balance, you will not be able to access your assets to trade or make transactions. This can be a big problem if the price of the currency drops significantly or you need cash quickly.

Refund terms may vary

These loans usually function like traditional installment loans, and depending on the crypto loan program, you may have less than a year to pay back what you borrowed. In other cases, you can draw up your own repayment schedule. With shorter repayment terms, it is crucial that you know in advance whether you can afford the repayments.

Not all digital assets are eligible

Depending on the crypto lending platform you use, you may need to exchange your currency for a qualifying asset. This may not be preferable if you want to keep your specific assets and they don’t qualify as collateral on a particular platform.

Interest account funds are not insured

If you lend out your own digital assets, the funds in a crypto interest account are not insured like the money in your bank account. So if the exchange goes wrong, you could lose everything.

Interest bill withdrawals can be slow

Generally, you can request a withdrawal from your crypto interest account at any time. But depending on the platform, it may take several days for this money to be released so you can use it. This can be very damaging if the value of your assets drops rapidly and you cannot trade them.

it comes down to

Before you dive into either side of crypto lending, it’s important to understand the risks, especially what could happen if the value of your cryptocurrency drops quickly and significantly. If you are considering crypto lending in any form, make sure you consider both the pros and cons, as well as all your other options, before making a decision.