Should You Borrow Crypto? Is it Safe?
These are crucial questions to help you decide whether crypto loans are a safe option for your crypto operations.
Digital assets have taken the financial world by storm since their inception. The emergence of cryptocurrency and blockchain technology has disrupted the traditional financial system.
Today, crypto enthusiasts are experiencing a wide array of new and exciting trends. Crypto lending and borrowing are among the most notable features this new financial system has introduced.
Loans obtained using digital currency as collateral are typically easier to get than traditional bank loans, but what exactly are crypto loans? What are the risks associated with getting one? And which crypto lending platform can you use to assess these loan funds?
This article will answer these questions and many more by taking a deep dive into the world of borrowing and lending using digital currencies.
Crypto Loans Explained
Cryptocurrency loans are acquired when a borrower pledges digital assets (crypto) as collateral in exchange for a loan amount. Its operation is similar to auto loans, where you obtain the loan and then pay it back over a certain period. Sometimes these periods can be extremely short with instruments called flash loans.
Investors always look forward to the appreciation of their crypto assets, and that's why they decide to "HODL," leaving the crypto holdings in their wallet until a future value growth. Could there be a better way of using the waiting time to further increase the value of these digital assets?
Crypto lending can help investors receive additional interest on their holdings. Additionally, when investors usually have a cash flow problem due to assets being tied up, they use these digital assets as collateral to obtain a secured loan in stable coins to meet their needs.
Crypto loans are obtained through a lending platform. A lending platform serves as the intermediary between lenders and borrowers. With this platform, the lenders, and the borrowers come together to make crypto lending possible.
The Pros and Cons of a Crypto-Secured Loan
A crypto-secured loan is an excellent tool to have as it offers investors many advantages, such as better interest rates and crypto rewards on some platforms. There are other benefits, and, of course, there are disadvantages. Let's consider some of them:
Easy to get personal loans
Unlike traditional institutions where a credit check is required and emphasis is placed on the borrower submitting a credit report, a crypto loan is seamless and easy to obtain as long as the collateral is provided.
Seamless and swift operation
The whole process of managing loan operations through a lending platform is automated. Smart contracts make the lending and borrowing process swift and efficient.
Easy to earn crypto rewards
An investor does not need to know who they are lending to. They basically drop their crypto holdings into a vault and begin to earn APY with minimal activity on their part.
Risk of Liquidation
The borrower's collateral is subjected to a high risk of getting liquidated because of the volatile nature of the crypto market. In the event of extreme price swings, the borrower has to add more assets as collateral or risk getting liquidated.
Risk of a Security Breach
Your loaned funds or collateral might be subjected to a hack due to the exploitation of weak security or a poorly written code.
Vague Practices of Lending Platforms
Some platforms only lend to overcollateralized borrowers, while some others do not disclose their lending practices. The danger here is that funds could be lost in the event of a very extreme price swing like a black swan event. Even though most platforms address this risk and have treasuries to support it, it is a possible risk worth mentioning since none of them is insured by FDIC.
Should You Obtain Crypto Loans?
Crypto borrowing is proving to be a brilliant and exciting idea in the crypto-verse. It gives you the opportunity to take out personal loans with low-interest rates.
If you are looking for ways to manage your digital assets while still getting funds to finance your needs, taking a crypto loan is a cost-effective approach. For every prudent investor, it is wise to consider some factors before getting a crypto loan. Consider the following suggestions before diving into lending and borrowing:
Take the time to understand the risks of handing over your crypto coins as collateral. The lending platform is not absolutely immune to a security breach, thereby taking the safety of your crypto assets out of your hands.
Market conditions will affect the value of the holdings of a lender and a borrower. Your assets will be locked up for a certain period. The crypto market is subject to rapid price volatility, so thinking beforehand about the effect of market volatility on your assets during lockup can prepare you to make good decisions when it happens.
Explore the crypto lending platforms thoroughly. There are several platforms available for taking out loans. As with any financial decision, you have to DYOR on the best platform and lending options that fit your own needs.
Still curious? Click here to dive into how to minimise risk when getting a crypto loan.
Frequently asked questions regarding crypto-backed loans.
Do I need collateral to obtain a crypto loan?
Yes, you need collateral to obtain a loan. The collateral will be in digital currency.
Do I need a bank account to obtain a crypto loan?
You do not need a traditional bank account to obtain crypto loans.
Are there risks to my crypto assets after securing a crypto loan?
Yes, there are risks, and you need to take time to understand them.
Which crypto lending platform is best for me?
There are several good options to choose from. You first need to determine if you will be going with either a centralized or decentralized platform. Other factors such as the minimum loan amount and interest rate should guide your decision-making.
Click here to dive into the safest crypto loan platforms.
How do my credit scores and credit history affect my ability to secure crypto loans?
Unlike traditional loans, where your credit score and history determine your ability to secure a loan amount, crypto loans do not require any of these. This means that you shouldn't be scared of any impact a credit check will have on your chances of securing a crypto loan, as there is none taking place.
Blockchain technology has clearly disrupted the world of traditional finance. Crypto loans have made it easier for a borrower to access funds, a lender to maximize their assets as collateral, and a holder of digital assets to earn passive rewards. This is indeed a powerful tool for all interested parties.
You have your part to play in choosing a platform fit for your needs and circumstances. Whether you decide to go with a CeFi or DeFi platform, it is essential that you take time to evaluate your risks and understand how market conditions can impact your decision.
Prioritize choosing a trusted platform, and you will increase your chances of safely borrowing crypto.