What is Crypto Lending and how does Crypto loan work?

Crypto lending is an ingenious tool for getting the money you need quickly, as it allows you to use your crypto holdings as a safety net to receive secure funds. If you are wondering how you can get cryptocurrency, secured cryptocurrency lending is a practical tool. This enables crypto users to use their crypto assets as collateral to receive funding in fiat currencies or stablecoins.

This allows you to receive cash without having to sell your coins, use the money to achieve your goals, and then agree to return your property. Cryptocurrency financing allows you to use the electronic property you own to generate profit by lending some or all of the ownership.

Crypto lending systems play a vital role in providing such funding. As a rule, you can get up to 50% of the value of your electronic property, although some systems may allow you to get much more. Crypto finance usually has no such idea as EMI and consumers can pay off when they can before the due date. In terms of interest rates, on the Celsius Network, they are around 4% for known non-stablecoin cryptocurrencies.

As for asking if cryptocurrency lending is profitable, it depends on several elements. If you waste time fulfilling your financial obligations, you forfeit your possession. The inconsistencies required for crypto ownership led to even more people wanting to get a loan in stablecoins On the Celcius and Nexo network, stablecoin loan providers can get 8%, while in Compound Finance, a decentralized crypto lending system, a percentage of the lending rate (APR) for Dai (DAI) and USD Coin (USDC) is 12% and 9% in particular.

What is Bitcoin lending? 

Everyone knows the usual centralized financial services: they are regulated by government acts or regulations and are issued and controlled by banking institutions. There are things to know when you want to apply for a loan. You need to apply to a specific organization that will make decisions about your solvency and the issuance or non-issuance of a loan. 

P2P lending is an alternative decentralized way to borrow money. Its essence is that the money is offered and used by the network users themselves. That is, the participants of the credit platform can borrow money or even provide themselves with amounts for loans within the network without an intermediary party, a bank. 

Cryptocurrency platforms act as a platform where borrowers and lenders interact directly. As a rule, both parties are ordinary people, some of whom need fast and cheap borrowed money, while others have free capital to invest.

The implementation of this principle of lending is presented on the platform of the WebMoney Transfer payment service, where users can exchange fiat money among themselves. Since 2013, such loans have also appeared on cryptocurrency P2P platforms: now you can also borrow cryptocurrency, most often bitcoins.

This Bitcoin lending mechanism is also very convenient for lenders, as it makes it possible to invest in several applications, and the risks that funds may not be returned will be reduced. All this can be called the concept of credit diversification.

Certain market participants live by taking funds, re-allocating them to other sites, and rewarding themselves. To get a good profit, you need to operate with large amounts of funds, since in this case, the profit on transactions is minimal.

Another hint is that the process can be fully automated. You can create a bot that can automatically process requests.

Should you provide bitcoin for lending?

Perhaps you are keen to find out if bitcoin lending is risk-free. Before embarking on a cryptosystem as a lender, make sure you understand the specifics. When you move your bitcoin into any type of system for lending, they get access to the secrets of the bitcoin, not you. You just really have a connection provided by a wise agreement.

If you start lending with your eyes closed, don’t be surprised if your bitcoin disappears. QuadrigaCX, for example, is absolutely nothing short of a scary tale. Netflix docudrama explores the controversial death of Gerald Cotton, owner of QuadrigaCX, a Canadian cryptocurrency exchange, and how he misused consumer funds. Approximately $190 million worth of electronic property held during the exchange was lost. Due to this most users have several questions on blockchain platforms like is Blockfi safe?

To sum up, you need to exercise due perseverance before messing with the system you will be using for lending. Regardless of the credit system, understanding the platform and its limitations is incredibly important when it comes to effective innings. A mistake can prove expensive, so it’s best to use your research skills.

How does stable coin lending work?

When it comes to interest rates, peer-to-peer (P2P) loans and loan versions are highly dependent on the circumstances of supply and need. A large amount of funds, combined with a reduction in supply from lenders, indicates a high return for lenders. However, if the need for crypto finance decreases and the supply from loan providers is high, the interest rate for consumers will certainly be lowered to attract consumers.

If you take into account why stablecoins have high-interest rates, this area can be quite useful. The concept of supply and demand leads to lending in stablecoins, offering double the annual return. Stablecoins are still a promising sector, accounting for only 2-3% of the total crypto market capitalization.

In credit systems, a significant portion of the credit supply comes from stable coins like Litecoin loans. Many people buy these coins only to deposit them in these systems, but this is surprisingly small compared to the supply of leading cryptocurrencies. Take the example of Compound Finance, where Ether (ETH) has 50% more gross supply than DAI and USDC.

Compare that to need and you’ll find the numbers are astounding. In Compound Finance, the need for DAI exceeds the need for ETH by almost 40 times. Large institutional investors and cryptocurrency redemption processors are lagging behind the huge demand for DAI. Institutional investors consisting of artisanal funds and market producers use crypto finance for speculative purposes.

How does a crypto loan work?

Thinking about how to get a crypto loan, there are things to take into consideration. One of which is securities-based funding. Cryptocurrency-backed funding provides electronic money. It’s like a mortgage. 

You provide your crypto assets to receive funding and settle it within a set time. These types of funding can be obtained through a crypto lending system or a crypto exchange. While you still retain your secured cryptocurrency, you are no longer eligible to make purchases using the coins.

Cryptocurrency is considered a practical choice due to several benefits such as lower interest rates, choice of funding money, no credit checks, fast funding, and the ability to earn easy income from crypto that already exists or still exists. In addition, you can provide your crypto coins and get high APY (over 10%) on several cryptosystems.

All credit purchases in the cryptocurrency have 2 characteristic events: the client and the credit institution. The client must make an initial deposit for the cryptocurrency as collateral to protect the financing from the lending institution. The setup works for the general benefit, as the client receives instant funding in exchange for their crypto holding, while loan providers receive an interest rate on the amount launched as funding. If the client does not meet his end of the bargain, he will take care of the underlying cryptocurrency to recognize his money.

What you need to know before you start crypto lending and lending

Crypto lending is the duplication of secured funds in fiat money. You have to be careful with several elements when lending cryptocurrencies like Bitcoin and Ethereum loans.

• As a borrower, you can’t access your collateral during the repayment period.
• If the value of the collateral diminishes below the standard threshold, the borrower must increase holdings to maintain the loan. This is called a margin call.
• A need might arise for lenders to sell part of the collateral to reduce the loan-to-value ratio.
• The borrower must make all repayments within a year depending on the type of program.
• Not all assets can stand in as collateral. Ensure you have done the research.
  

  How to borrow bitcoin

  Whether you are looking for crypto lending on Binance, Coinbase, or any other system, the basics remain the same. Borrowers have to go through the implementation of the steps.

  • Open an account on Binance an example of one of the best bitcoin loan platforms. Once you do this, you are eligible for the loan scheme.
  • Then, go to the part responsible for borrowing. Input the amount you want to borrow. 
  • Then, the platform calculates the amount of cryptocurrency needed for collateral purposes.
  • Proceed to deposit the collateral and apply for the bitcoin loan.
  • The platform, Binance, undertakes a verification process of the collateral.
  • Once it is approved by the lender, the borrower receives the loan.

You should note that on the platform, all users have their ratings, which directly affect the size of the offered rates and the number of bitcoin loans. Each new user of the platform must provide truthful information about himself.  The security service will conduct a thorough check of your identity and verify the data you provide for veracity and relevance. You can not worry about the safety and non-distribution of your data.

Before sending all the requested information, you will be presented with an agreement that spells out the rights and obligations of each party. The site administration guarantees the confidentiality and safety of the data you provide

Types of crypto loan

Perhaps the best way to understand the best crypto loan platforms and marketplaces work is to explore the different ways in which users can participate, starting with the simplest and moving up to the most advanced.

• One-platform lending with one asset

It is the most basic and most used aspect of the crypto lending market: lending. It’s helpful to check rates across different platforms with a tracker like the CoinMarketCap interest rate tool to find the best rate of return for the asset you want to borrow.

• Tax-free USD liquidity

Crypto Holders may have a significant portion of their savings in their portfolio, but selling these assets when they need cash triggers a taxable event. While this is not a tax recommendation and you should consult a tax advisor for your specific needs, using your cryptocurrency as collateral for a dollar loan can be a great way to get liquidity to cover expenses without losing investment risk or having to pay taxes on your profit.

• Arbitration

Taking another look at CoinMarketCap, we see opportunities for interest rate arbitrage, where you borrow an asset from one platform and lend to another. 

Many bitcoin borrowers have speculated on the question, Is Coinloan safe? To answer this, you should know you can deduce it is one of the only platforms available that gives you the ability to specify lending/borrowing terms for your loans, such as asset, duration, and interest rate. 

• Margin trading/leverage

The rise of crypto lending has also led to easier access to leverage, without the need to go through a centralized exchange. A user can gain leverage by essentially taking out a loan, buying additional collateral, and increasing the loan amount in a cycle until the limit is reached. This acts as a “long” investment in whatever collateral you choose. Youholder review also talked more about this loan concept. 

Notable mentions:

• Liquidation
• Flash loan
• Secured loans

Types of Bitcoin loans

Cryptocurrency financing allows you to receive the necessary amount in stablecoins and at the same time not sell your cryptocurrency in case of an emergency. The terms of repayment, possible loan amounts, as well as for which coins you can receive funds, depend on the chosen lender platform.

There are two types of Bitcoin loans;

• Peer-to-peer lending (P2P) is when one person lends their bitcoins to another.
• B2B – “platform lending”. Investment platforms usually offer to invest between 25% and 50% of the loan in cryptocurrency and can recover most of the losses, which allows investors to avoid losing money.

Advantages of bitcoin loans

• Retaining ownership of the crypto asset

Let’s say you are a happy owner of 2 BTC and don’t want to sell them because you are sure that the coin will grow significantly. And your business requires additional financing. In such a situation, a Bitcoin loan is a good opportunity to retain ownership of the cryptocurrency and receive a loan in stablecoins. After the deposit period, your bitcoins can rise in price and bring you additional profit.

• Lack of credit check

For this option, you won’t need to go through a credit check to qualify for a cryptocurrency-backed loan, which can make it a great option for borrowers who don’t have the best credit history. 

• Fast funding

Once approved, you can receive your loan funds in just a few hours.

• Possibility to lend cryptocurrency 

Many crypto exchanges offer “interest-bearing” accounts that allow you to borrow your digital assets and receive high APY in return – sometimes over 10 percent.

Crypto lending is always over-collateralized and therefore more secure than other forms of lending, such as peer-to-peer lending.

• No bureaucracy

There is no need to license your activities and pay taxes, you do not need to keep records and submit reports to regulatory authorities. This most directly frees lenders from unnecessary transaction costs and lowers interest rates on loans.

• Internationality

Everyone interested in the issue of European or American lending has heard that interest rates on loans in our country and European or US countries vary greatly. In Ukraine, a loan can be taken at 30%, while in America such services cost 10 times less. You can take loans in bitcoins from users of any country in the world.

• Fast and inexpensive transfers

Intercontinental or transcontinental traditional money transfers use the work of dozens of intermediaries, which, in addition to speed, also affects the cost of such operations. In the case of bitcoins, there are no such problems – any international transfers occur instantly and do not have a high cost (the size of the commission is determined depending on the network load).

Disadvantages of bitcoin loan

Since the value of cryptocurrencies is more volatile than other assets, you may find yourself in a situation where the value of the digital currency falls, requiring an increase in collateral to maintain credit (margin call). In some cases, the lender may sell assets to reduce the loan-to-value ratio. 

Depending on the platform you are using, some digital assets may not be eligible for loans, so it may be necessary to convert your cryptocurrency to another asset type (wrapped tokens ). You will also not have access to your assets until you repay the balance of the loan, which means you will not be able to quickly sell or exchange your cryptocurrency.

Conclusion

Deciding whether or not to take a loan in bitcoins should be done responsibly and consciously. To begin with, it is worth carefully analyzing your current financial situation, the need for a loan, and all the upcoming expense items that await you for the loan period. 

Also, don’t forget that Bitcoin is a cryptocurrency, which means that its value has a very wide range of volatility. You can take out a loan when 1 BTC is worth 8,000 USD, and in a month you will have to buy Bitcoin for 10,000 USD. 

To ensure that borrowed money brings benefits and does not disturb your peace of mind, plan all your financial payments and receipts, and do not take on your first Bitcoin loan for too much.