What Is Crypto Lending?

People buy a cryptocurrency and prefer to stay invested long-term to yield a highly appreciated value. Liquidating investment during credit shortages can be an undesirable option for crypto-enthusiasts. 

The crypto lending facility allows you to borrow fiat money. You can meet the stringent eligibility criteria of current financial institutions to get the required capital this way. 

What Is Crypto Lending?

To get a cryptocurrency loan, you must collateralise your digital assets, such as Bitcoin (BTC), Ether (ETC), etc. Considering the current market price of the entire value of those mortgaged cryptos, the lending institutions give you fiat currency as a loan.

However, since cryptocurrencies are highly volatile, crypto lending institutions instruct you to over-collateralise compared to traditional credit facilities like home loans or loans against property. In other words, you must lock up cryptocurrencies valuing more than the sum obtained as a loan. This higher loan-to-value ratio lets crypto lenders manage the risk of the volatility of cryptocurrency’s market valuation.

After you repay the debt with a certain interest, the lender will return the collateralised cryptocurrency. You can add those to your digital wallet. If the current market value of digital money increases, you can benefit from that appreciation. 

Apart from this, you can enjoy several other advantages from this crypto lending facility.

Benefits Of Crypto Loans

Here are all the advantages of borrowing fiat currency through crypto lending:

• Easy access to credit

You can get a lump sum credit easily and quickly by keeping your cryptocurrency as collateral. You can meet the strict eligibility requirements of traditional lending facilities. Crypto lenders need to check what your profession and credit score is. 

• Smart contract-based loan

The lender issues a smart contract to make the borrowing process seamless and secure. Only authorised entities can access the contract to see the stored data. 

• Passive earning prospects

You get back the same number of cryptocurrencies collateralised for borrowing. If the value of that digital asset appreciates during the repayment period, you can enjoy the percentage yield. So, your earning prospect remains intact even if you do not hold the amount actively. 

Crypto Lending Platform:

One can get access to cryptocurrency loans through centralised and decentralised platforms. Let’s know these in detail.

• Crypto loans on centralised exchanges

Centralised lending platforms like Binance, Nexo and BlockFi let you get the borrowing facility. 

Centralised platforms ensure higher security by maintaining necessary protocols. Some lenders also give additional insurance to the mortgaged cryptocurrency and keep those in their cold storage. By saving in cold storage (hardware wallet), they disengage those digital currencies from the internet connection. It ensures that malicious attempts do not steal your information and that private keys stay protected. Following are some major centralised finance (CeFi) provides:

• Loan on Binance

With the crypto lending facility from Binance, you can borrow stablecoins, including USDT (US Dollar Tether) and BUSD (Binance USD). It would help if you gave cryptocurrency like BTC or ETH collateral for the lending facility.

It gives the loan for a tenor of 7/14/30/90/180 days. Customers have to pay an hourly interest charge against the borrowed credit. 

• Loan on BlockFi

You can borrow stable fiat money from BlockFi at a low-interest rate that starts from 4.5%. It helps you get the required amount within the same day to meet credit requirements immediately. Borrowers can repay the loan without paying additional charges to release their crypto assets. 

• Crypto loans on decentralised exchanges

Decentralised Finance (DeFi) platforms let you borrow fiat money, other cryptocurrencies or USDC without any middlemen or unnecessary KYC verification. The lending process is completely automatic and done in a codified way. The smart contracts facility protects confidential loan-related information through necessary protocols.

You can get a loan by keeping your Bitcoin or Ether as collateral. You need to create an account on a DeFi platform and send the cryptocurrency to a particular digital wallet specified by the platforms.

With the decentralised finance option, you do not need to disclose your identity for borrowing purposes. Here are some of the DeFi lending platforms:

• Aave

Apart from borrowing, you can deposit cryptocurrency and earn interest on the capital on Aave.

• Maker

This DeFi platform lets you borrow only DAI coins, a stable digital currency. One of the major advantages of this platform is that it gives a higher loan-to-value ratio. You can lend up to 66% of the market value of your collateral.

Things To Consider Before Taking A Crypto Loan

It would help if you considered the following aspects while borrowing through a crypto lending platform to stay at a good point:

• Margin call

Crypto lenders opt for a margin call if the market price of the collateral decreases beyond a pre-set threshold. They request borrowers to buy more cryptocurrency and increase holdings in this scenario.

• Loan-to-value ratio

Lending platforms also have a loan-to-value ratio determining the maximum amount you can borrow by pledging your crypto assets. For example, if a lender gives 50% LTV, you can get 50% of the current market price of collateral as a loan. 

• Interest rate

Interest rate also varies across different platforms. It would help if you compared the rate while choosing a lender for borrowing. Apart from this, platforms like Binance charge hourly interest rates. Therefore, you must check every aspect of the interest rate before taking the credit facility. 

• Zero access to the crypto asset

It would help if you also kept in mind that until you repay the debt, you cannot make any changes to your holdings. You lose your authority to sell your digital assets even if their market price keeps falling.

Bottom Line

Crypto lending allows you to borrow fiat currency without liquidating your digital assets. To borrow through this facility, you do not have to meet the eligibility criteria, including credit score, monthly income, etc. You can enjoy the appreciated value of the cryptocurrency even when you keep those assets as collateral.