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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.
Crypto loans are usually easier to get than traditional bank loans because digital currency can be used as collateral. 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
In exchange for a loan amount, a borrower can get a cryptocurrency loan by putting up digital assets (crypto) as collateral. It works like an auto loan in that you get the money and then pay it back over a certain amount of time. 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 wallets until 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. Also, when investors need cash but can't get it because their assets are locked up, they use their digital assets as collateral to get a secured loan in stable coins.
Crypto loans are obtained through a lending platform. A lending platform serves as an 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 a great tool for investors because it gives them many benefits, such as better interest rates and, on some platforms, crypto rewards. There are other benefits, and, of course, there are disadvantages. Let's consider some of them:
Pros
Easy to get personal loans
Traditional institutions require a credit check and place a lot of weight on the borrower submitting a credit report. A crypto loan, on the other hand, is easy to get as long as the borrower has collateral.
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 put their cryptocurrency holdings in a vault and start earning APY with little work on their part.
Cons
Risk of Liquidation
Due to how volatile the crypto market is, there is a high chance that the borrower's collateral will be sold. In the event of extreme price swings, the borrower has to add more assets as collateral or risk being liquidated.
Risk of a Security Breach
Your loaned money or collateral could be hacked if the security is weak or the code is poorly written.
Vague Practices of Lending Platforms
Some platforms only lend to people who have more assets than they need, while others don't say how they lend money. 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 the majority of platforms address this risk and have treasuries to support it, it is a potential risk worth mentioning because none of them are FDIC-insured.
Should You Obtain Crypto Loans?
In the crypto industry, crypto-borrowing is proving to be a brilliant and exciting idea. It gives you the opportunity to take out personal loans at 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. Before getting a crypto loan, every smart investor should think about a few things. 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 of time. 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 decide on the best platform and lending options that fit your own needs.
Learn more
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 a centralized or decentralized platform. Other factors, such as the minimum loan amount and interest rate, should guide your decision-making.
Learn more
Click here to dive into the safest crypto loan platforms.
Safest Crypto Loan Platforms →
How do my credit scores and credit history affect my ability to secure crypto loans?
Your ability to obtain a loan amount on traditional loans is determined by your credit score and history. Crypto loans, on the other hand, don't need any of these things. This means that you shouldn't be scared of the impact a credit check will have on your chances of securing a crypto loan, as there is none taking place.
Verdict
Blockchain technology has clearly disrupted the world of traditional finance. Crypto loans have made it easier for people to get money, for lenders to get the most out of their assets as collateral, and for people who own digital assets to get passive rewards. This is indeed a powerful tool for all interested parties.
You have your part to play in choosing a platform that fits 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.
Choose a trusted platform first, and your chances of borrowing crypto safely will go up.
