Bitcoin Loans: Your Guide
All you need to know about Bitcoin loans.
Bitcoin is often referred to as the king of cryptocurrencies, and for a good reason. With a market cap of over 500 billion dollars, this pioneer cryptocurrency dominates more than 40% of the entire crypto market cap.
Because of its premier status among cryptocurrencies, Bitcoin has grown to be a hub for institutional and retail crypto investors. They see it as a store of value, a hedge against inflation, and the currency of the future.
However, in recent times, Bitcoin has evolved beyond all that. It can now be staked, used to make payments, given as gifts, and lent to others. There are even Bitcoin ATMs (Automated Teller Machines) that allow you to exchange Bitcoin for cash easily!
In this article, we will discuss Bitcoin loans, one of the most popular uses of Bitcoin lately.
What Are Bitcoin Loans?
Bitcoin loans are crypto-backed loans where Bitcoin is either lent or borrowed. Borrowers may put down fiat or other cryptocurrencies to get a Bitcoin loan, while lenders may earn interest back in BTC or other currencies of their choice.
Even though there are now many crypto lending platforms that mediate between lenders and borrowers, Bitcoin lending likely started as peer-to-peer transactions between two parties.
It has since grown into a full-fledged industry valued at over $10 billion, along with other cryptocurrency loans! It's safe to say that Bitcoin lending will remain a hot topic for years to come.
Why Take a Bitcoin Loan?
This is usually one of the first questions people ask when contemplating Bitcoin loans. What's the appeal? Why bother? Well, consider a few reasons:
Bitcoin Loans vs. Traditional Loans
Unlike traditional loans, Bitcoin loans do not require much processing. In most cases, they are usually disbursed within hours, sometimes minutes. In traditional banking, loans may take days or even months before they are approved and disbursed.
No Geographic Limitations
You can get a Bitcoin loan anywhere without moving a muscle. You don't even need a bank account. In most cases, you can't do that with traditional banks. Even if you were to get an international loan, the process could be nerve-racking.
Lower Interest Rates
The interest rates on Bitcoin loans are much lower than those on traditional loans. For example, the highest interest rate on Nexo, a popular Bitcoin lending platform, is 13.9% APR. On the other hand, interest rates can climb as high as 35.99% APR with traditional banks.
Little or No Credit Check
Traditional banks usually require good to excellent credit scores before giving you a loan. That is not the case with Bitcoin loans. Usually, all you have to do is deposit your collateral, and you’re good to go.
Even though some Bitcoin lending platforms request KYC registration before giving you loans, the process is not nearly as intensive as the credit checks traditional banks require before granting you a loan.
Bitcoin Loans vs. Other Crypto Loans
Bitcoin's market cap is more than double that of Ethereum, the second-largest cryptocurrency (at the time of writing). Therefore, there is less risk of loan liquidations with Bitcoin because of its relative stability.
A Wider Variety of Lending Platforms
Because of Bitcoin's deep liquidity, more crypto lending platforms are offering Bitcoin loans as a service. Some even offer only BTC for loans.
Higher Loan-to-Value Ratio
Next to stablecoins, Bitcoin comes with one of the highest LTV ratios available on most lending platforms. This simply means you can get more loan proceeds from Bitcoin than most other volatile cryptocurrencies.
What Are The Risks?
Even though there are many benefits to Bitcoin lending, it comes with some risks. Balanced crypto investors do well to consider these risks with the benefits before deciding. Some of those risks are:
Despite the deep liquidity of Bitcoin, there is still the risk of collateral liquidation if the market goes through extreme price swings. Liquidations happen when the price of your collateral decreases to a certain threshold.
You can reduce, or eliminate, the probability of liquidations by keeping an eye on your LTV ratio and keeping some cash on the ground to boost your collateral value in times like this.
If you put down your Bitcoin as collateral with a lending platform, you entrust your precious Bitcoins into their care. If the platform is hacked, goes bankrupt, or turns out to be a scam, you won't get your Bitcoin back.
You can reduce this risk by finding out as much as you can about the Bitcoin lending provider before you entrust your collateral to them.
Most traditional banks are insured. That means that you will get your collateral back even if something happens to the loan provider. That is more than we can say for crypto loan providers, as most of them are often unregulated.
Some, like Nexo and BlockFi, have insurance provisions to cover the unexpected, but that is the exception rather than the rule.
How to Get a Bitcoin Loan
So you now know what Bitcoin loans are. It has been a tough decision, but you have decided to take a Bitcoin loan. The next step now is to get the loan. How exactly can you do that?
You don't have to undergo a rigorous process before securing an instant bitcoin loan. You just have to sign up on a Bitcoin lending platform, complete KYC registration, deposit your collateral, and receive your loan proceeds. Easy peasy!
Your identity won't even need to be verified in some cases. You just come with your collateral and get your loan.
Factors to Consider Before Getting Bitcoin Loans
The Loan-to-Value Ratio
This ratio describes the relationship between the value of the loan you receive and the collateral you put down. You can use your loan to value ratio (or LTV ratio) to determine how much you will get and how close you are to liquidation.
For example, if your Bitcoin LTV ratio is 50%, you're entitled to get up to 50% of your collateral value as a loan. The higher the LTV ratio, the more you're liable to get.
Also, the higher your LTV ratio, the closer you are to liquidation. For example, you'll get a margin call if your LTV ratio gets up to 70% on BlockFi. If it gets up to 80%, your collateral will suffer liquidation.
The Loan Repayment Options
How soon are you required to repay the loan? Will you pay it all back at once or make periodic payments over time? What is the liquidation policy like? If you can't pay back on time, do they liquidate your collateral all at once, or is it partial liquidation? Are there any prepayment fees?
Before starting an account with a Bitcoin lending platform, you should ponder those questions. It's also imperative to read their terms of service to be sure what you're getting into.
The Minimum Loan Amount
This varies from platform to platform. For example, the minimum loan amount on Nexo is $50, while it is $10,000 on BlockFi. So, the old saying is true here: cut your coat according to your size.
The Crypto Lending Platform
This is a critical point to consider. Whether you're a lender or borrower, you need the Bitcoin lending platform to be as secure as possible. That way, you can have peace of mind as you enjoy the benefits of Bitcoin lending.
Later in this article, we will suggest some legitimate Bitcoin lending platforms. They are merely suggestions; you still have to determine if they will work for you or not.
The Interest Rate
This also differs from platform to platform and is another thing you should watch out for before applying for a loan. You should also remember that a lower interest rate does not necessarily equal a better loan. But, if you've considered everything else and you find a legit platform with lower interest rates, go for it.
Also, some platforms allow you to cut back on interest rates through their loyalty programs. On Nexo, for example, you can get as low as 0% APR when at least 10% of your portfolio is in NEXO tokens.
Bitcoin loans can be taxed. This is another thing you need to know. You should consider how much tax you are liable to pay and if there are any provisions for reducing your tax obligations.
For example, if you take out your loan proceeds in fiat, you are legally exempt from tax payments. Also, if your Bitcoin loan is for business purposes, your interest payments are tax-deductible.
Where to Get a Bitcoin Loan
We will now discuss four reputable platforms that offer Bitcoin lending services.
Nexo was created in 2018 and has grown to be one of the leading platforms for lending Bitcoin and other cryptocurrencies. It has 33 supported cryptocurrencies and aims to create banking services based entirely on digital assets.
The platform claims to have military-grade security and follows up that claim with third-party audits and a $375 million insurance fund. It's safe to say it is one of the most secure Bitcoin lending platforms available.
Apart from crypto loans, Nexo also offers other banking services and perks. For example, you get 2% cashback on making purchases with the Nexo card. Nexo also has a loyalty program and a referral program.
BlockFi is another lending platform that is popular with crypto investors. It has been around since 2018 and was the first lending platform to be legally recognized in the US. It offers loan services with a minimum loan amount of $10,000 and a maximum LTV ratio of 50%.
Similar to Nexo, BlockFi goes beyond crypto loans. It also offers a rewards credit card, trading, and a personalized yield service (for high net-worth individuals).
Binance hardly needs any introduction in the crypto world. It is the largest crypto exchange and has been foremost in various crypto sectors.
Among its many services, Binance offers crypto lending and borrowing. Here, you can get instant crypto-backed loans that last up to six months. You get an initial LTV ratio of 65% for Bitcoin loans, with interest charged hourly.
Unlike many other lending platforms, Binance doesn't charge prepayment fees. You can pay back the entire loan even before your loan period is due.
How to Use Your Bitcoin Loan
You likely know why you need your Bitcoin loan before applying for it. Or you have gone through this article and have seen that you're in a prime position to request a Bitcoin loan. But what (or what else) can you do with your Bitcoin loan? Consider:
Invest in Other Crypto Assets
If you see an opportunity for profit in other crypto sectors and don't wish to sell your BTC to fund it, you can get a loan instead and use your Bitcoin as collateral. If all turns out well, you make more money while still holding on to your Bitcoin.
Remember that it could go the other way too. So, do your research well before using your Bitcoin loan in this way, so you don't end up with double losses.
Sometimes, life comes at us very fast, and we may need to make an unexpected personal expense. It could be anything from paying your mortgage to settling some medical bills. In cases like that, where you need quick cash and have the major part of your net worth in Bitcoin, a Bitcoin loan might come in handy.
Get A Self-repaying Loan
These are loans that repay themselves. How do they work? A self-repaying lending platform puts your Bitcoin collateral in a yield farm. Thus, the interest generated by the yield farm pays off your loan over time.
Alchemix is an example of a platform that offers this service. At present, their services are offered only for Ethereum and Ethereum variants, but they'll soon extend their services to Bitcoin holders as well.
In crypto, hedging means opening two trade positions in opposite directions so that a gain in one direction offsets a loss in the other direction. It's a way to mitigate risk and follow the most promising trade direction in a given timeframe.
You could do that with Bitcoin loans too. If you take a Bitcoin loan and then use the loan proceeds to short Bitcoin, you put yourself in a position to profit from Bitcoin regardless of its price direction.
If Bitcoin's price goes down, your shorted trade yields a profit for you (even though your collateral may suffer liquidation). On the other hand, if Bitcoin's price goes up, your collateral increases in value (even though your shorted trade may suffer).
However, it's easier said than done. So, think about it carefully before going down this road.
Bitcoin loans are here to stay. They offer a way to put your Bitcoin to use without selling it. They’re excellent alternatives to traditional loans. However, the lack of regulation and the risk of liquidation mean that investors should be wary when considering these types of loans.