If you need money urgently, tokens or cryptocurrencies can be sold on an exchange, exchanging them for dollars or any other currency. Thanks to this, it is easy to know the asset’s value at any time. And this is the undeniable advantage of a loan secured by cryptocurrency. The lender receives as collateral an asset with a completely clear value.
To date, two types of Crypto Lending can be distinguished:
- The first option is fully decentralized lending, which involves smart contracts, special programs that spell out the relationship between the borrower and the lender. From the technical point of view, it is a very interesting solution because everything is determined by the program code, which controls the fulfillment of obligations by both parties. However, the use of a smart contract does not allow for the addition of loan agreements, refinancing, or fiat money in the transaction.
- The second type of cryptocurrency, which I consider the most promising, is a loan secured by existing assets. As you know, cryptocurrency has its value, and you can always find out how much it is worth today on the exchange. In the same way, your house, car, or land has value. And lending institutions and other companies with the appropriate licenses are willing to lend against these values.
When the Crypto Lending is backed by cryptocurrency, the point of scoring disappears. Even real estate can be insufficient collateral because no one knows exactly how much it will be worth when it is sold. And the price of the cryptocurrency can be found out in a split second.
But there is a downside to this feature. The borrower needs to remember that the value of tokens is determined by market demand and quotes on exchanges. Therefore, lenders usually hedge against a possible drop in the collateral value when granting a loan. A typical option is to demand urgent repayment of the loan or part of it to increase the size of the collateral. Or the parties agree in advance on the automatic sale of tokens in the event of a rapid decline in their price.
Features of Crypto Lending
The adoption rate of cryptocurrency is still far from ideal. Most car dealerships, travel and real estate agencies, brokers, and other places to spend your credit are still not getting along with cryptocurrency. Now you may ask – why even bother with cryptocurrency lending?
Crypto Lending Instant. Cryptocurrency lending is a lot like fiat: it’s capital issued to you that you can use right away. But with cryptocurrency, you can access that loan in minutes, regardless of its size.
Crypto Lending requires no permission, is available to everyone, and is unlimited. Compared to banks, the only thing you require for a bitcoin lending service is the amount of cryptocurrency you can temporarily provide as collateral. That’s why cryptocurrency lending platforms don’t require a credit check or documentation. This is what makes them accessible to all people in the world: even if you have no credit history (or bad credit) or even a bank account, you can get a loan.
Crypto Lending is limitless: your maximum loan amount depends only on the amount of cryptocurrency you can provide as collateral. If your loan-to-value ratio is 50%, you will need to invest 1 BTC to get $13,000 or USD. A loan-to-value indicator is used by lending services to protect against loss of funds. To get Crypto Lending online, you just need to have a safe wallet to store and use cryptocurrency and provide other cryptocurrencies as collateral. In this article, we’ve described the top hacks on how to increase your income by giving out cryptocurrency loans and explained the risks.
Cryptocurrency lending is an excellent substitute for classic exchanges and cryptocurrency exchanges. Instead of selling your cryptocurrency, it is better to keep it with you but make it bring value at the same time.
Cryptocurrency lending is quite a dangerous activity, both for the lender and the borrower. The advantage of this process is that the credit system, in this direction, is not quite developed yet. And this means that there is no clear interest rate, and if you look hard, you may find an offer that’s good for you. And because of this, you can act as an intermediary just like regular banks do: borrowing money at a low-interest rate from the Central Bank and giving it away at a much higher rate to the borrower.
Because there is no fixed interest rate, lenders are freer to act. If the borrower has no choice, lenders can lend at high-interest rates. In these situations, it is advisable to pay off the loan as soon as possible to not overpay too much in interest. Remember that lending is an additional way to hedge risk. It turns out that crypto lending has both advantages and disadvantages. But even with the disadvantages, you can understand that this industry is growing fast and has potential in the future.