Hodling crypto assets is often highly appreciated. But if you are not making good money through holding your cryptos, what else can be the option? You can consider crypto lending. Crypto lending is one of the hottest topics in the crypto industry, with its high potential to give returns.
In this article, you will learn what are crypto loans and how crypto lending works?
What are crypto loans?
Crypto loans or crypto lending allow investors to lend their cryptocurrencies to borrowers in exchange for interest or dividends.
While borrowers use their cryptos as collateral to obtain funds/loans in fiat or stable coins. They can also use fiat currency (USD, CAD, etc.) or stable coins as collateral to borrow crypto loans.
Investors have the option to sell the collateral to cover losses if the borrower does not pay off the loan amount.
How does crypto lending work?
Crypto lending happens through a crypto lending platform that connects the borrowers and lenders. The lenders want to earn passive income with their cryptocurrencies while waiting for value appreciation. A borrower is the one who wants a loan.
Crypto lending involves the following steps.
- A borrower goes to crypto lending platforms and requests a loan.
- Once the platform approves the borrower’s loan request, the borrow has to stake his cryptos as collateral.
- Lenders transfer fund the loan amount to the borrower automatically through the platform.
- Lenders will receive interest un till the loan period.
- The borrower cannot claim his stake until he pays back the entire loan amount. When he pays back the whole loan, he can get back his collateral.
This is how crypto lending generally works, but it may vary depending upon the lending platform.
For further understanding, let’s consider an example.
Suppose an investor holds some cryptos, and the market price is on the rise. He does not want to sell them still wants to earn some profits on his assets. He will lend his cryptos to a borrower. The borrower will pay some interest (i-e 3%) on a regular basis to the lender. In this way, a lender is earning on his cryptos while retaining the ownership of his assets.
If a borrower wants a loan of $5000 via a crypto loan, he will need to deposit $10,000 to $13000 worth of ETH for receiving a loan of $5000 in cash. This ratio may vary depending upon the lending platform.
How to borrow and lend cryptocurrency?
When you borrow cryptocurrency, you must choose the right platform, a trustworthy and good reputed platform. Because, unfortunately, if the platform is not legit, you will end up losing your collateral. Next, you need to find out the right cryptocurrency to borrow depending upon the market price. Also, consider how much interest you have to pay on a particular platform. All these steps will help you to learn how to lend cryptocurrency and make a passive income out of it.
Similarly, when you are lending cryptos, you should choose a reliable platform. Choose the crypto you want to lend depending upon the market price and how much interest you will receive on it.
Benefits of crypto loans
The following are the benefits of crypto loans.
- Crypto loans do not involve credit score assessment. Either you have no or poor credit score, you can get a crypto loan.
- Crypto lending is more accessible for the unbanked community.
- The time to pay back the loan is flexible.
- Unlike traditional loans, you can instantly get a crypto loan.
- You also have a choice to switch between crypto assets.
Drawbacks of crypto loans
The following are the drawbacks of crypto loans.
- The minimum borrowing requirements can be high on some platforms. You must have enough holdings to get a minimum loan amount from the lender.
- You generally have 12 months to pay back the loan amount. It means you do not have a lot of time to pay back the loan. And in case you fail to pay back on time, the platform may liquidate your collateral.
- If the value of your collateral drops, you may need to deposit more into your account to your collateral secure. Because otherwise, the platform may sell your holding.
- There is no insurance against crypto loans.
Popular crypto lending platforms
The following are the few most popular crypto lending platforms out there.
DeFi lending platforms: MakerDAO, Compound Finance, Aave, Alchemix, etc.
CeFi lending platforms: Celsius Network, Nexo, BlockFi, etc.
Crypto loans are an easy alternative to traditional loans with instant access. Though these loans come with some risks, their benefits are worth considering. Do your own research before making any decision.