According to Statista, cryptocurrency market revenue is projected to hit $51.5 billion in 2024. With the constantly changing and evolving cryptocurrency landscape, an innovative financial service that is steadily gaining momentum in the crypto space is borrowing and lending. Below, we explore all you need to know about borrowing and lending in the crypto space, how it works, and factors you should consider.
What Is a Cryptocurrency Loan?
Cryptocurrency loans are secured loans where a crypto holding is used as collateral as a means of exchange for liquidity from lenders. The borrower will pay back the loan in installments, and when fully paid, they can get back their cryptocurrency. The amount of loan is usually called the loan-to-value ratio (LTV), that is a certain percentage of the value of the collateral. Some of the popular cryptocurrencies are Bitcoin and Ethereum with terms as high as five years and annual percentage rate (APR) less than 10%.
Types of Cryptocurrency Loans
Cryptocurrency loans are of two primary types, the decentralized finance (DeFi) and centralized finance (CeFi). Centralized loans are custodial and the lender controls the cryptocurrency during the loan duration. On the other hand, DeFi loans make use of smart contracts for managing the loan, and allows borrowers to get control of their assets. However, decentralized loans usually have higher interest rates than centralized finance loans.
The Process of Cryptocurrency Lending
Cryptocurrency lending allows an individual to borrow money which can either be cryptocurrency or cash, usually for a fee which ranges from 5% to 10%. Essentially, it is a secured personal loan that allows you to keep ownership of the cryptocurrency used as a collateral. However, you will lose the right to use it for transactions and trading. Additionally, if the value of the digital asset significantly drops, it may translate to owing more than was borrowed if you default on your loan.
The Use Case for Cryptocurrency Loans
Like personal loans, cryptocurrency loans offer individual flexibility, meaning that borrowers can use the loans for different purposes such as business startups, debt refinancing, and down payments. This provides the opportunity for connecting people with financial opportunities, and further gives the unbanked access to banking.
How to Obtain a Cryptocurrency Loan
You must own a cryptocurrency which will be used as a collateral if you want to apply for a cryptocurrency loan. When you have selected a trusted lender and understood their terms, create an account, verify your identity and holdings, then choose your details. Some cryptocurrency lending platforms usually have fast approval and funding time, typically within 24 hours. If you don't have a cryptocurrency for collateral, you can buy Bitcoin or other cryptocurrencies from trusted cryptocurrency platforms.
Advantages of Cryptocurrency Lending
Though cryptocurrency involves huge risks, there are some inherent advantages which include:
- Fast funding: When approved, individuals gain access to the loan funds within hours.
- Low interest rates: Though they are not as expensive as car or mortgage loans, cryptocurrency loans are less expensive when compared to credit card or personal loans. The interest rates are typically below 10%.
- No credit check: Cryptocurrency lending platforms usually don't run a credit check on an individual when he applies. This makes it very attractive for individuals with no credit and poor credit history.
Disadvantages of Cryptocurrency Lending
Even with the advantages of cryptocurrency lending, there are various disadvantages that individuals must consider before considering a cryptocurrency lending platform. Some of them are:
- Security risks such as cybercrime and hacking.
- Limited regulatory oversight from government bodies and regulatory bodies alongside uncertain future regulations.
- Extreme penalties for missing payment deadlines (Losing cryptocurrency assets).
- Price volatility of cryptocurrencies which affects loan-to-value-ratio.
Endnote
Cryptocurrency lending is an innovative financial tool that offers numerous benefits such as fast fund access and low interest rates. However, while the benefits abound, there are also huge risks due to uncertainties about regulation and market volatility. As the cryptocurrency space grows, an understanding of the intricacies involved is crucial for individuals seeking to enter this dynamic market.
