What is Cryptocurrency Lending?
9 min readTable of Contents
So you’re probably not from this century, or you’ve been cut of modern civilization of the world’s current financial system, you should at least have come across the term ‘crypto lending’ — this phenomenon(cryptocurrency lending) is gradually opening up opportunities for cryptocurrency players big and small. It s what is driving Ethereum ‘s decentralized finance economy to over $1 billion in locked valuation.
Blockchain has been aggressively undermining and fundamentally changing the mainstream finance landscape right from money transfers and also investing activity. Particularly with De-Fi systems providing at least 10 times higher interest rates than conventional banking structures, institutional interest in the cryptocurrency lending environment has been spurred.
Crypto lending has gained a lot of interest in the past few years, going further than the admiration of marginal bitcoin enthusiasts, and has now become a common topic among banking experts and institutional investors.
What is Cryptocurrency lending?
Crypto Lending is a transaction in which you can lend your crypto and earn interest rates that accrue over a period of time. The transaction is supported by Crypto Lending Platforms selling loans to various cryptocurrencies such as Ether, Bitcoin, and Stable Coins. The same network may even be used for lending or borrowing loans if you eventually used crypto as leverage. This theory is therefore referred to as Crypto-backed loans.
It is the two exchange groups of a trade for one [who lends or invests] it’s crypto-loans, meanwhile for the other [who borrows] it’s crypto-backed loans.
There’s a fairly basic concept at the very core of cryptocurrency lending, and this is: borrowers are allowed to use their Cryptocurrency as leverage to secure a fiat or stable coin assets, while lenders possess the assets required for the loan at a negotiated rate of interest. This may also operate the other way around, where borrowers employ fiat or stablecoins as leverage to fund crypto properties.
You’ll probably notice there’s nothing really ground-breaking here — they’re just collateralized loans — however, borrowing and lending are strong financial primitives that unlock a wide range of applications and advantages for businesses, institutions, traders and users.
In addition, in the the-Defi zone, this primitive has been opened for unregulated, free, and composable access to lending. It contributes to other opportunities, such as customized pricing across networks and “fast lending,” in which consumers may employ atomic transactions to borrow maximum assets from a lending network as long as it is paid back in the very same transaction, and of course with interest rates.
It’s really not a surprise that the emergence of Cryptocurrency has birthed innovative techniques for borrowing and lending. Commencing with Bitbond and BTCJam in 2013, crypto lending has however become one of the most diversified areas in the sector of dispersed ledger technology.
How does a crypto loan work?
Borrowers deposit collateral to obtain fiat or digital properties in return, regardless of whether you chose to go with a centralized or decentralized lending network, however, the basic tenant doesn’t change the way the market works.
The sites themselves are avoiding the hassle of determining the creditworthiness of borrowers and thereby consequently causing massive default rates through relying on collateral-based loans.
People who make use of these platforms profit from this strategy as they are able to decide on the purpose they would like to use the money. Traditional lending platforms, decide how the loan should be used. Crypto ‘s leading sites, though, do not.
On the other end of the spectrum, the need to deposit any form of collateral disrupts the essence of the crypto lending platform. For instance, Crypto financing may be best described as a short-term infusion of money rather than, a corporate model.
Individuals who need to pay off unforeseen bills or want to make a major purchase at the moment will deposit their Cryptocurrency in exchange for cash. If the principal and interest rate have been accrued, the equity is allocated to the creditor. It has proved especially appealing to ‘day’ traders in the crypto market.
This being said, it is also appealing to lenders because of the relatively favorable ratio of loan-to-value. This ratio determines the balance between the sum lent and the sum of collateral received.
For instance, in the scenario of SALT Lending, lenders can receive between 30% and 70% of the cash value of their collateral. The larger the amount of the bond, the greater the average interest rate and the more lucrative the credit.
To demonstrate this point, you can imagine a borrower asking for $10,000 over 12 months with a 70% LTV. This would require $14,286 in assets. The interest rate will be 11.95 percent, culminating in a debt of $11,337.
In the same context, however, with an LTV of 30%, the borrower will require collateral or assets worth $33,333. The interest rate will be about 5.95 percent and the overall amount of the lending amount will be $10,737. It is worth bearing in mind that distributed networks, such as SALT Lending, usually have their own token providing more competitive interest rates in the crypto lending market.
Types of crypto lending platforms – Centralized vs. decentralized
A variety of lending sites have sprung up within the crypto industry and can be divided into a centralized and decentralized platform, after 2018. The essence of the differences is who or what is involved in the lending and borrowing process — business or protocol.
Centralized lending platforms are more like conventional fintech organizations that focus on Cryptocurrency — they follow the processes of Know Your Customer, have a custodial strategy to prevent your assets, and can form standard business relationships with institutions, such as making deals on specialized crypto lending agreements on a lending platform.
These services typically offer interest rates decided by the company, which often include, in particular, higher returns for lenders of crypto assets such as Bitcoin (BTC) and Ether ( ETH) than their decentralized equivalents.
Decentralized lending networks, including initiatives like Compound, originator, and dYdX, act as protocols that can be used by anybody at any time without KYC or custody. With perhaps the exception of Maker, where its decentralized governance system establishes interest rates, these decentralized platforms have variable interest rates determined by the supply and demand of the platform asset. Based on the interest rate feature, this may often contribute to major increases in interest rates, with dYdX often increasing to more than 30% for borrowers.
Can you lend Bitcoin?
To give a straightforward answer, Yes! you can lend a bitcoin. Much more like the conventional style of asking a friend to lend you money, an individual loans bitcoin for an agreed interest rate. Except for this time, there are platforms to carry out such activity.
You can always get a loan in Bitcoin without going through a platform by visiting online forums and dealing directly with individual dealers. You may not have to pay a market place charge, so it’s far riskier for both lending and borrowing activities.
That is because it’s much difficult to check someone’s identity on a forum market place. So if anything went wrong, you do not have the legal means to have your money back.
Forums are better reserved for seasoned bitcoin traders who have a good understanding of how to detect fraud. Another tip would be that, should you want to loan bitcoin to a friend, you might as well get familiar with the platform.
Best Bitcoin Lending Platforms 2020
The word which started out as a misspelling of “HOLDing” rapidly caught on in the community. With time, it became an acronym for Hold on for Dear Life, which is appropriate given the asset’s volatility.
As a result of the prevalence of the strategy, lots of bitcoin community members have large bitcoin holdings. And bitcoin loan no collateral is a way to put these holdings to good use.
- YouHodler – The highest LTV offer in the market
- Bankera Loans – Best for the safety of your digital assets
- BlockFi – The only crypto account to offer compound interest and trading
- Nexo – The most advanced platform for crypto loans
- Celsius Network – Fee-free crypto lending
- Bitbond – Best small business loans platform for those without bank accounts
- SALT Lending – The platform with the most market experience
- Nebeus – The best platform for concurrent crypto-backed loans
How do you borrow Cryptocurrency?
At the basic level, cryptocurrency loans work like the traditional lending system you have set up in a bank ( which involves lending and borrowing). In the bank, it’s borrowed money that you pay back and as well as interest and fees over a determined period of time. However, for cryptocurrency lending, you deal with bitcoin or any other crypto. Now depending on the interest rates and agreement, you pay back in installments.
In the same light, you can also offer bitcoin credit lines and short-term loans with bitcoin or any other cryptocurrencies. You should bear in mind that you can also earn interest rates, as the borrower, much more like the conventional banking style.
Which is where most similarities end. Since cryptocurrency isn’t associated with any centralized government or financial entity, the average Cryptocurrency lending would come from other cryptocurrencies. You would still need to pay some interest on the existing exchange rate in your charges.
Peer to peer Network
The best route to getting a bitcoin or other cryptocurrencies loan is via a peer-to-peer network that links investors to borrowers, typically for a charge. To borrow from a cryptocurrency lending platform, it is necessary to create an account and wait for a verification score.
Trust score
Bitcoin creditors don’t depend on usual ways to evaluate your creditworthiness, like your credit report or your debt-to-income ratio. Rather, the lending platform offers you a confidence score — oftentimes termed a credit score or rating — based on how well your financial records and identification can be verified. It’s essential to submit detailed information to get a good trust ranking. This will also depend on the intended crypto lending loan amount.
Immediately, your account has been checked, you may need to choose your category and upload your application form. You will get a crypto lending deal in as few as a few hours and get your money immediately as long as you approve it. An important tip is to keep your rates in mind.
Documents required
If you’re not working to a conventional lender, some of the paperwork you need to have to receive a bitcoin loan would be different than regular ones.
- ID provided by the Government. Your passport scan is preferable since all of these places are worldwide. Search your username. Utility charges on your side are perfect.
- Verification of your email address
- Verification of your address
- Verification of your credit card
- Connection to your social media
- Connection to your online payment accounts
- Verification of your Income
Criteria for Eligibility
Getting a cryptocurrency loan would be much less involved than going to a bank. But then you do have clear qualifying criteria. To enter a bitcoin marketplace and find creditors willing to lend to you at a reasonable rate, you usually have to:
- Live in a nation where Cryptocurrency is controlled, like the United States.
- Have a steady career that you can boast of
- Have a high score of trust.
Before you leave
In summary, cryptocurrency lending offers an easy opportunity to earn passive income if you have digital assets that you do not need at the moment or are not planning to use any time soon. It is also an excellent choice for all those who are involved in Cryptocurrency and investing but do not have the time to cope with the difficulties of day investing.
Given all the benefits, some vigilance is always recommended. If you’re not sure what businesses are worth your confidence, there are resources out there to help you out. Like all financial decisions, do your due diligence before you lend crypto or take out a crypto loan.
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