Cryptocurrencies are, indeed, a unique and idiosyncratic asset class. And, similar to others, a house or a stock, it can certainly serve as collateral for loans.
But what is a Crypto loan? How do crypto loans work?
Let’s keep reading the article till the end to find out more about it.
Crypto Lending – A Technical Overview
Crypto lending, in essence, is the procedure of depositing or submitting crypto that’s lent out to borrowers in return for enormous interest payments. However, it will also be made in the form of cryptocurrency, which will be compounded on a monthly, weekly, or daily basis.
When it comes to getting a crypto-backed loan, you can usually opt for two different options, including,
- Centralised lenders, and
- Decentralised lenders.
As the name implies, the option is assessed and regulated by a government body. Hence, you may have to offer some sort of price to the government to work with them. However, there is no need to do so with a decentralised option. Both of them generally offer a high-interest rate. And, sometimes, it can go up to 20% APY. You must deposit collateral to access them too.
Types of Crypto Loans
Like the conventional loaning system, there are several types of crypto loans available in the market as well. Here’s what you requirement to know about them.
1: Collateralised Loans.
The most popular option in the market, collateralized loans, generally require deposited Crypto that’s later used as the collateral for the loan. Most platforms offering this service will require a little bit of over-collaterisation. So, the borrower can only access a certain percentage of the amount they’ve deposited. The lower the LTV is, the lower your interest rate will be.
2: Uncollateralised Loans.
Unlike their counterpart, uncollateralized loans aren’t too popular in the market. However, they usually work as any other personal loaning system does. As a borrower, you’ll be asked to fill up a loan application form and pass identity verification. Although there’s quite a lot of hassle entangled with it, these loans still have a higher risk of losing all your money.
3: Flash Loans.
These are a type of instant loaning procedure, which are generally available on various crypto exchanges. In this case, you will need to repay the loan in the same manner of borrowing the same. Although they are quite risky, you can use them to take advantage of various arbitrage opportunities in the market – like buying at a lower price and selling at a higher range.
Risks Associated With Crypto Lending
Crypto lending, in all honesty, is inherently risky for both the borrowers and the lenders. After all, the deposited fund is going to be beholden to the volatile crypto market. And, if the borrower loses money, it’s possible that the lender is going to lose some too.
However, that’s not all. Crypto lending can come with some other risks as well:
- Due to the current situation of the global financial system, liquidation, especially of Cryptocurrencies, has become an issue. So, even if you earn a lot of money, you may only be able to access or liquefy them sometime soon.
- Most of the Crypto lending platforms are unregulated. Therefore, if you lose your cash or it gets stolen somehow, you’ll be solely responsible for that. Even the government will not be able to help you out with it.
- The interest rate of Crypto lending tends to be pretty high. Thus, if you’re considering borrowing even a small amount of the same from there, it will be best to do thorough planning first. Or else you’ll fall into a never-ending pothole.
So, Should You Borrow Crypto?
Yes. If you are interested in Crypto trading but don’t have enough Cryptocurrency in your account, borrowing Crypto will certainly be an option. Just make sure to be wary about the risk related to the same, and we think that you’ll be fine.