8 Reasons You Should Lend Your Crypto
If you have crypto assets just waiting for a rise in value, now might be a great time to consider lending your crypto. Here's why.
Lending is as old as the financial system. Yet, an individual couldn't access crypto loans from any platform until recently. The service was previously unavailable.
In the past few years, the crypto market has undergone massive growth. As a result, many platforms in the space now offer crypto loans to potential borrowers.
The loans on offer are secured by deposits provided by investors to lending platforms. As a reward, these investors earn interest on their assets after borrowers pay them back. If you have some idle crypto assets, now might be a great time to consider lending your crypto. Here's why.
1. High-Interest Rates on Deposits
When someone has financial assets they want to capitalize on, they look for the best returns. Lending platforms express interest rates for deposits using APY (annual percentage yield).
They may also express it using an APR (annual percentage rate). APY ties in with compound interest rates, while APR is more suited to simple interest rates.
Most traditional bank accounts offer interest rates of around 0.1% on their savings accounts. Profits on a crypto savings account, on the other hand, can reach 36%. The high interest rate reflects the demand for the asset on the platform.
2. More Efficient Use of Crypto Assets
In the past, the traditional method of earning on cryptocurrencies was to hold onto them. The goal was to wait for these assets to appreciate after positive price movements.
Although this method was successful if you held certain assets, it was not without its flaws. Market volatility meant that assets could appreciate and depreciate within a short period.
There is still the possibility of some of these coins increasing in value. Yet, holding onto them in the hopes of appreciation is a bad long-term strategy. As an alternative, you can let your crypto holdings grow in value over time by lending them out.
Over time, the value of a deposit can go up a lot because of the interest payments on a crypto loan. This possibility increases if the crypto loan pays compound interest.
3. Risks Involved Are Lower
The best investors understand that high rewards are usually tied to considerable risks. Yet, for crypto loans, borrowers get paid significantly with little risk.
A crypto loan is a secured loan in that the borrowers can only get loan funds that their initial deposit can cover. Thus, borrowers can only access specific amounts of loans based on their leverage. Please note that the value of a borrower's loan is usually below their collateral.
Usually, the leverage is in the vicinity of 2:1 or 3:1. Borrowers would need to deposit three times the value of a crypto loan to be eligible to borrow that amount.
This stipulation helps to protect the lending platform. If the asset price of the collateral changes too much, lenders can liquidate the deposit. Liquidation will help the lender pay back the depositors. This is like a margin call for those familiar with traditional banking systems.
4. Wider Market Access
Crypto lenders have access to a broader market of borrowers. Currently, their reach exceeds that of traditional financial institutions. Most crypto lending platforms are not regulated. This may be subject to change based on current legislative actions.
Being on the fringes of regulatory pressure opens up opportunities for crypto lenders. These platforms can attract individuals who can't access traditional financial institutions.
This includes people who can not hold international bank accounts. It also applies to people who can't access loans from corporate interests. These factors set up a unique value proposition for crypto lending.
5. Support Unbanked Borrowers
Approximately 1.7 billion people in the world today don't have savings accounts. These people still have assets and holdings with value in their economic ecosystem. Yet, getting a loan to further their business initiatives is next to impossible.
Leveraging a digital currency loan doesn't require a credit check or history. Individuals can take out personal loans in small amounts to meet their needs.
On some platforms, one can leverage loan amounts as low as $50. The loan amount might not seem like much. Yet, converting to other currencies may offer a lot of value for unbanked people.
6. No Need for Mining Hardware
Crypto mining is a viable way to generate income for investors. Unlike mining, crypto loans don't require anyone to create a high-end PC to mine the assets. Mining may be on the way due to its high energy consumption.
Crypto loans allow investors to get involved in this space without restrictions. Borrowers don't have to worry about the mining and proofing processes.
7. Straightforward Process
Crypto lending platforms don't force their clients to jump through too many hoops. All lenders need to do is deposit their assets on the platform.
Borrowers don't need to jump through the hoops of credit checks. Also, borrowers take on the risks of the loan themselves. On their part, lenders keep ownership of their assets on the platform. Through this frictionless process, crypto borrowers and lenders can seek financial freedom.
8. A Variety of Crypto Assets Are Available
Already, there are a lot of digital assets that individuals can deposit to earn interest. Stablecoins like USDC and USDT go with standard digital currencies like ETH and BTC.
Some lenders offer attractive interest rates for deposits managed by the platform itself. Others use automatic market makers (AMMs) to adjust the interest rate. Changes operate based on supply and demand.
The Bottom Line on Lending Your Crypto
Personal loans will always be an in-demand product. In centralized finance, lending organizations tend to make most of the profits. Under this system, investors get a small return on their initial investment.
Crypto lending offers better returns on deposits. It also removes much of the risk attached to one's digital currency holdings. DeFi platforms are the best return on investment that a depositor can get. Lending your crypto could be a viable way to achieve financial independence.
Disclosures
The content is only provided for informational purposes. It is not meant to be tax or financial advice, and it does not recommend any particular investment plan. Every investment has risk, including the possibility of a cash loss. Past performance does not guarantee future results.
Bitcompare does not guarantee good investment outcomes. The way a security or financial instrument did in the past does not show how it will do in the future. Before investing in options, clients should carefully assess their financial goals and risk tolerance. Due to how important tax issues are in all lending situations, a customer who is thinking about borrowing money should talk to a tax expert to find out how taxes affect the outcome of any lending strategy.