How To Lend Or Borrow Money Using Cryptocurrency As Collateral: Everything about Crypto Loans
Cryptocurrencies have fast grown to become a popular asset class, especially because of their perceived value which almost always rises in the long run as opposed to the short run’s usually unstable value. Their ability to grow in immense volumes and turn investments that started as a few hundreds of dollars, in many cases, into millions of dollars has drawn a lot of attention to the space, leading to the creation of many decentralised finance (Defi) applications, with one of the most popular types being in the area of cryptocurrency lending.
While owning large amounts of cryptocurrencies today is common, people usually sell their cryptocurrencies in other to access the cash value so they can use the funds to carry out transactions, non-crypto investments, or make their ends meet. The problem with this method is that once they sell the cryptocurrency, they no longer own the same quantity and even if the value of that cryptocurrency rises 10 times, they don’t benefit from its growth as they would have if they didn’t sell.
With the fast growth of Defi applications, cryptocurrency holders no longer have to always sell their cryptos to access the finance needed to carry out other transactions, which would have caused them to potentially miss out on future gains. Now, they can simply use their cryptocurrency as collateral to get a stablecoin as a loan, which they can then convert to fiat money for use and to repay at a later time, all without selling a part of their existing cryptocurrency portfolio.
What Are Cryptocurrency Loans?
Just like the loans traditional financial institutions issue that is collateralized, cryptocurrency loans are also collateralized by other cryptocurrencies and are issued by a decentralised financial application. But unlike banks that use your cash flow and credit rating to determine if you’re eligible to collect a loan, all that is completely unnecessary in the cryptocurrency world because all that is required by Defi apps is to use your crypto assets as collateral during the period where the borrower has to repay the loan.
Some DeFi apps would require that the borrower uses cryptocurrency of up to 150% as collateral and the borrowing period could be anywhere from 7 to 360 days depending on the lending platform. The reason the lending or borrowing period is usually very short is that cryptocurrencies are highly volatile, unlike traditional fiat currency, making the transaction risk very high for both the lender and the borrower since the cryptocurrency could become worthless during the period of the contract.
You can either borrow cryptocurrency loans in the form of stablecoins like USDT which can be converted to fiat money like the US Dollar or you can lend cryptocurrencies to borrowers and earn an income.
Reasons For Obtaining Cryptocurrency Loans
Just like traditional loans, there are many reasons for obtaining cryptocurrency loans. Some of the most popular are:
1). Unwillingness To Dilute Crypto Assets:
If you have to sell your cryptocurrencies to have access to fiat cash for any alternative use, then you lose the potential margins that could have been gained if the cryptocurrency appreciated in value. To avoid diluting their crypto assets, traders instead borrow against them for other uses and repay later without losing the original crypto assets and the potential gains they could have made.
2). For CeFi or DeFi Investments:
Cryptocurrency loans could be used in Centralised or Decentralised finance investments like crypto staking, lending, trading and more. When investors do this, they can also earn an income on the loan they took and repay when they have the projected margins they were aiming to make.
3). For Traditional Investments:
Since most cryptocurrency investors have traditional investments they are interested in or currently running, they can use cryptocurrency loans to start or expand their investments without the need to sell their cryptocurrencies, and then repay the loans with the profit margins.
4). For Personal Use:
Cryptocurrency loans could also be used to fund personal expenses like travel & relaxation expenses, hospital bills, rent, and much more. The idea here is most people taking these loans plan to either pay back with the capital gains on the cryptocurrency they placed as collateral or with income that is non-crypto related.
How To Get Cryptocurrency Loans
Here are 11+ platforms you can borrow or lend money using cryptocurrencies as collateral:
AAVE is one of the most popular decentralized financial applications that allows cryptocurrency investors to borrow or lend cryptocurrencies. The depositors on the platform provide a liquidity pool in the form of cryptocurrencies to be able to earn passive income while the borrowers on the platform provide collateral in the form of cryptocurrencies to enable them to borrow from the platform.
On AAVE, the crypto loan is given in the stablecoin form of USDT, which can further be converted to fiat currency.
You can visit AAVE here.
Nexo, just like AAVE enables investors to lend and borrow cryptocurrencies on their decentralised financial platform. They offer a wide range of cryptocurrency options that can be used as collateral by borrowers and provide a great environment for lenders to be able to earn interest on the cryptocurrencies they lend through the platform.
On Nexo, the crypto loan is given in the stablecoin form of USDT, which can further be converted to fiat currency.
You can visit Nexo here.
Binance is one of the largest cryptocurrency exchanges in the world and also provides a centralised financial platform for borrowers to get cryptocurrency loans while using cryptocurrencies like BNB, Bitcoin, Ethereum and some others as collateral.
On Binance, the crypto loan is given in the stablecoin form of BUSD, which can further be converted to fiat currency.
You can visit Binance here.
While these are the most popular cryptocurrency loan platforms, some other cryptocurrency loan platforms are:
- Mirror Protocol
How To Pay Back Cryptocurrency Loans
Every cryptocurrency lending platform has its mode of operation. Most would require you to transfer the repayment to the platform’s wallet address. but if in many cases you do not pay back during the period, the platform would dilute your collateralized cryptocurrency to retrieve their investment.
Also, if the value of the cryptocurrency you used as collateral falls below a certain price, the lending platform would automatically dilute it to protect the lender’s investment.
To Sum It Up
Cryptocurrency loans are essential for every cryptocurrency investor because it provides them with the opportunity to get access to finance to carry out other transactions without having to dilute their cryptocurrency investments. It also offers the lender an opportunity to generate passive income from their cryptocurrencies while they continue to appreciate in value.
By understanding the importance of cryptocurrency loans and taking advantage of them, any cryptocurrency investor can be able to make the most of the cryptocurrency trend and maximise the overall returns from their investments without having to sell them.
The best part is you can access cryptocurrency loans from anywhere in the world in under a few minutes as long as you own cryptocurrencies the platform will accept.