Bitcoin Loans: Your Guide
All you need to know about Bitcoin loans.
Bitcoin is often referred to as the "king of cryptocurrencies," and for good reason. This first cryptocurrency has a market cap of more than $500 billion, which is more than 40% of the total crypto market cap.
Due to the fact that Bitcoin is the most popular cryptocurrency, it has become a hub for both institutional and individual cryptocurrency 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'll talk about Bitcoin loans, which have recently become one of the most common ways to use the currency.
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 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.
Since then, it and other cryptocurrency loans have grown into a real business worth more than $10 billion. 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
Instant Disbursement
Unlike traditional loans, Bitcoin loans do not require much processing. In most cases, they are disbursed within hours, sometimes minutes. In traditional banking, loans may take days or even months to be 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 make you sign up for KYC before they give you a loan, the process is not nearly as complicated as the credit checks that traditional banks do before they give you a loan.
Bitcoin Loans vs. Other Crypto Loans
Deeper Liquidity
Bitcoin's market cap is more than double that of Ethereum, the second-largest cryptocurrency. Because Bitcoin is relatively stable, there is less risk of loans being paid off early.
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
Bitcoin has one of the highest LTV ratios on most lending platforms, right behind stablecoins. This simply means you can get more loan proceeds from Bitcoin than from 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 and the benefits before deciding. Some of those risks are:
Liquidations
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 drops below 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 hand to boost your collateral value in times like this.
Platform Security
When you use your bitcoin as collateral on a lending platform, you are giving them your valuable bitcoins. 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.
Regulation Problems
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, 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 only need to sign up on a Bitcoin lending platform, complete the Know Your Customer (KYC) registration, deposit your collateral, and then get the loan money. 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 likely to get. Also, the higher your LTV ratio, the closer you are to 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 on time, do they liquidate your collateral all at once, or do they liquidate it in stages? 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 $100 on YouHodler. 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.
Tax Regulations
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.
YouHodler
YouHodler is a platform that provides crypto loans and allows users to spend cash while saving or holding their crypto assets. Users of the YouHodler platform are spoiled for choice because it supports over 50 cryptoassets, including bitcoin, that can be used as collateral.
YouHodler works with Ledger Vault and other crypto service providers to make sure that crypto assets are safe. Ledger Vault provides insurance for YouHodler’s stored assets through a pool of $150 million in crime insurance funds.
YouHodler gives its users more than just crypto loans. For example, it has a crypto exchange, a savings account, and a way to earn interest by "staking."
Nexo
Nexo was created in 2018 and has grown to be one of the leading platforms for lending Bitcoin and other cryptocurrencies. It has a 35 that supports cryptocurrencies and aims to create banking services based entirely on digital assets.
The platform claims to have military-grade security and backs up that claim with third-party audits and a $775 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 purchases made with the Nexo card. Nexo also has a loyalty program and a referral program.
Binance
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. Learn more about Binance.
How to Use Your Bitcoin Loan
You likely knew why you needed your Bitcoin loan before applying for it. Or you have gone through this article and seen that you're in a prime position to request a Bitcoin loan. But what else—if anything—can you do with your Bitcoin loan? Consider:
Invest in Other Crypto Assets
If you see an opportunity for profit in other crypto sectors but 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.
Personal Expenses
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 majority 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? Your bitcoin is used as collateral in a yield farm by a self-repaying lending platform. 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 the moment, they only work with Ethereum and variants of Ethereum, but they will soon start working with Bitcoin holders as well.
Hedging
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 short 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.
Final Thoughts
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.