8 Reasons You Should Lend Your Crypto
Lending is as old as the financial system. However, an individual couldn't leverage a crypto loan from a platform until recently because no such service existed. In the past few years, decentralized finance has developed to the point where many companies are now offering their clients crypto loans. The amount that the lending platform gives to the client comes from someone else's deposit, and that person earns interest when the borrowers pay back the lending platform. 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.
1) High-Interest Rates on Deposits
When someone has financial assets that they want to capitalize on, they look for the best rate of return. A lending platform will express the interest rates for deposits in terms of APY (Annual Percentage Yield) or APR (Annual Percentage Rate). APY is used for compound interest rates, while simple interest rates are expressed as APR. A traditional bank account offers an interest rate that hovers around 0.1% for a savings account. Comparatively, the profits on a crypto savings account may get as high as 36%. The high-interest rate reflects the demand for the asset on the platform.
2) More Efficient Use of Crypto Assets
The traditional method of earning on cryptocurrencies in the past was to hold onto them and wait for them to appreciate. While this method has proved successful with some assets, the volatility involved means that the asset may appreciate one day and then depreciate the next. There is still the possibility of some of these coins going up in value significantly, but holding onto them in the hopes of appreciation is a bad long-term strategy. Lending your crypto holdings allows the investment to increase in value over time. Interest payments on crypto loans can significantly increase the value of a deposit over time, especially if that crypto loan pays compounded interest.
3) Risks Involved Are Lower
Common knowledge in investing is that high rewards are usually tied to considerable risks. However, when you lend crypto, you get paid a significant amount but don't expose yourself to a massive amount of risk. A crypto loan is a secured loan in that the borrowers can only get loan funds that their initial deposit can cover. When someone deposits crypto into a platform, they get a certain borrowing power based on their leverage. Borrowers can only get a loan amount that is below that leverage. Typically, 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 ensures that if the asset price of the deposited crypto changes too much, the platform can liquidate the deposit and pay back the depositors. For those familiar with traditional banking systems, this is similar to a margin call.
4) Wider Market Access
Crypto lenders have access to a broader market of borrowers than traditional financial institutions. A crypto lending platform isn't regulated, although this may be subject to change based on current legislative actions. Being on the fringes of regulatory pressure means that a crypto lending platform can tap into individuals that may not be welcome in traditional financial institutions. This group includes people who live in areas of the world where their government has made it untenable for them to hold international bank accounts or get loans from corporate interests. This broader market access also means that crypto loans can access portions of the financial markets that are permanently off-limits to banks, setting up a unique value proposition for crypto lending.
5) Support Unbanked Borrowers
There are approximately 1.7 billion people in the world today that don't have a savings account. These people still have assets and holdings that have value in their economic ecosystem. However, getting a loan to further their business initiatives is next to impossible. Leveraging a digital currency loan doesn't require a credit history or credit check. Personal loans can be made in small amounts to help individuals meet their needs. On some platforms, one can leverage a minimum loan amount of $50. The minimum loan amount might not seem like much, but converted to other currencies, it may offer a lot of value for unbanked individuals around the globe.
6) No Need for Mining Hardware
Another way for individuals who want to get involved in cryptocurrencies to get some value under their best is to set up their own mining rig. Crypto loans don't require anyone to put together a high-end PC to mine the assets. In fact, mining may be on its way out because of how environmentally unfeasible it is. Many of the current coins on the crypto market are shifting to a different work method to prove their blocks. This shift increases the chain's efficiency, allowing it to approve transactions much quicker than the current methodology. Crypto loans are a way for investors to get involved in the crypto markets without caring about the mining and proofing process.
7) Relatively Straightforward Process
Crypto lending and borrowing don't force their clients to jump through too many hoops. For lenders, all they need to do is deposit their assets into the platform. Borrowers don't need to jump through the hoops of a credit check to leverage their borrowing power. Borrowers take the risks of the loan onto themselves, while lenders retain 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 Supported
Already, there are a lot of digital assets that individuals can deposit and earn interest from. Stablecoins like USDC and USDT accompany the standard digital currencies like ETH and BTC. Some platforms offer an attractive interest rate for these deposits managed by the platform itself. Others use automatic market makers (AMMs) to dynamically adjust the interest rate based on supply and demand on the platform.
The Bottom Line on Lending Your Crypto
Personal loans will always be an in-demand product. However, in centralized finance, the lending organizations tend to make the bulk of the profits, while the lender gets a small return on their initial investment. Crypto lending offers better returns on deposits and removes much of the risk attached to one's digital currency holdings. Defi platforms are arguably the best return on investment that a depositor can get. Lending your crypto could be a viable way to land financial independence.