Cryptocurrencies have been experiencing growing popularity and widespread adoption since 2019, both in the United States and around the world. Last November, the global market capitalization of cryptocurrencies exceeded 3 trillion US dollars. Approximately 17 percent of Americans have already invested in, are investing in, or regularly trade cryptocurrencies. These 17 percent amount to approximately 40 million people who have already started using cryptocurrencies. Despite all the people who have become wealthy through cryptocurrencies, we must be aware that most cryptocurrencies are highly volatile. The value of Bitcoin (BTC), the world’s most well-known cryptocurrency, doubled in 2021, but its price dropped sharply in just the first month of this year.
For cryptocurrency users who are not concerned about short-term volatility because they are in it for the long term or trade daily, they can now use their digital assets as collateral for loans. Here is what you need to know about cryptocurrency lending, along with some advantages and disadvantages that are worth considering.
How cryptocurrency lending works
A loan secured by cryptocurrencies uses digital currency as collateral, similar to securities-based loans. The basic principle works like a mortgage or car loan. You can pledge your crypto assets to obtain a loan and repay it over time. This type of loan can be obtained through a crypto exchange or dedicated crypto lending platforms.
While you retain ownership of the cryptocurrencies you used as collateral, you lose certain rights, such as the ability to trade them or use those cryptocurrencies to carry out any transactions. Additionally, you should be aware that if the value of your crypto assets drops significantly, you may end up owing the crypto exchange or crypto lending platform considerably more than you borrowed.
People may consider crypto loans because of the benefits they offer and because they have no intention of trading or using their crypto assets in the near future. From such people, you may also hear the word HODL, which stands for “Hold on for dear life,” meaning that these people intend to hold their crypto assets for longer periods of time.
Advantages of crypto loans
Compared to traditional secured loans, crypto loans have unique characteristics that can make them attractive to some crypto enthusiasts:
- Low interest rates: although generally not as cheap as, say, car loans, crypto loans are an affordable alternative to personal loans and credit cards. There is a very high likelihood that you will obtain a crypto loan with an interest rate below 10 percent.
- Loan amount based on asset value: in many cases, you can borrow up to 50 percent of your portfolio’s value, with some exchanges reaching as much as 90 percent.
- Choice of loan currency: depending on the platform and what you need, you can generally receive loan funds in the form of US dollars or a chosen cryptocurrency. Most people here opt for cryptocurrencies that rank among the top ten by market cap.
- No credit check: cryptocurrency lending platforms and exchanges typically do not perform any credit checks on the person seeking a loan. It is precisely this feature that makes it an exceptionally attractive option for people with no credit history.
- Fast funding: once the exchange or platform approves your loan, you can receive it within just a few hours.
- Ability to lend cryptocurrencies: many cryptocurrencies offer “interest-bearing” accounts that allow you to lend your own digital assets and receive a high APY in return, which can exceed 10 percent.
Things to consider before borrowing cryptocurrencies
There are quite a few obvious advantages to using your cryptocurrencies as collateral for a loan. However, due to the nature of secured loans and cryptocurrencies, there are also some disadvantages:
- Margin calls: a margin call occurs when the value of your collateral falls below a certain threshold and the lender requires you to increase your holdings to maintain the loan. In some cases, the lender may even sell some of your assets to reduce the loan-to-value ratio. Since cryptocurrencies are extremely volatile in the short term, the chances of this happening can be significant.
- No access to your funds: as long as your loan has an outstanding balance, you cannot access your holdings for trading or any transactions. This can be a huge problem if the currency price drops sharply, you urgently need cash, or the price rises significantly and you want to profit.
- Repayment terms may vary: these loans typically work like traditional installment loans, and depending on the crypto lending program, you may have less than a year to repay the borrowed funds. In other cases, you can create your own repayment plan. With shorter repayment terms, it is crucial to know in advance whether you can afford these payments.
- Not all digital assets are eligible: depending on the crypto lending platform you want to use, you may need to exchange your currency for a more eligible asset. This may not be desirable if you want to keep your specific asset and it is not considered collateral on any platform.
- Funds in interest accounts are not insured: if you are lending your own digital assets, funds in a crypto interest account are not insured like money in your bank account. So, if the exchange fails, you could theoretically lose everything.
- Withdrawals from interest accounts can be slow: in general, you can request a withdrawal from your crypto interest account whenever you want. However, depending on the platform, it can take up to several days for those funds to be released and available for use. This can be very damaging if the value of your assets drops quickly and you are unable to trade with them.
How to choose a crypto lending platform?
When choosing any crypto lending platform, there are several factors to consider. The most critical ones are:
- Interest rates: choose a platform based on the interest rate of a specific coin on any given platform.
- Platform risks: review the platform’s history for a better understanding.
- Fees: compare the costs of different platforms for different coins.
- Deposit limits: check whether there is a minimum deposit requirement or not.
- Loan duration: check whether it is fixed or not.
- Collateral: compare the amount of collateral you need to obtain a specific loan amount across different platforms.
The most important point is that you need to choose the right platform for a specific coin. For example, if you see that Binance provides better returns for lending Bitcoin (BTC), consider using Binance for Bitcoin.
You don’t necessarily have to borrow all cryptocurrencies on the same platform. There are a huge number of crypto lending platforms available, so research as many as possible to find out where you can get better returns for your chosen cryptocurrency, while also taking into account the factors mentioned above.
On the other hand, lenders should also compare different platforms to see where they can get the highest returns.
The most popular crypto lending exchanges
CoinRabbit
When it comes to crypto lending, there is one of the simplest and most well-known solutions: CoinRabbit. Thanks to its simple interface and no-KYC approach (you only need your email address or phone number to create an account), CoinRabbit is one of the most popular solutions for both beginners and experts who greatly value their time.
Despite the ease of use, CoinRabbit pays great attention to the security of their customers’ funds. Multiple security and AML (Anti-money laundering) checks are always performed. Upon receipt of funds, they are withdrawn into cold wallet systems. Additionally, you can further protect your account with 2FA (Two-factor authentication).
The APR (Annual percentage rate) is only 1.2 percent per month and is complemented by completely free withdrawals available at any time and with unlimited time frames for your loans. You can repay them partially or in full whenever you feel it is necessary. In addition, CoinRabbit offers a system for lowering your liquidation price.
For those looking to earn a decent passive income, CoinRabbit makes the process extremely simple and fast. A fixed 10% APY with no additional conditions is one of the highest on the entire market. Interest is paid out daily, and you are free to choose when to withdraw your earnings.
Despite the fact that the service is still very young, it is quickly gaining momentum and has already established itself in the community of numerous crypto coins, working closely with market players such as ChangeNOW, Guarda Wallet, Atomic Wallet…
SpectroCoin
Among the many things SpectroCoin does for cryptocurrencies, crypto loans are one of the most useful features of this platform for many users.
Based on a specific cryptocurrency, you can choose the loan-to-value ratio (LTV) yourself, ranging from 25 to 75 percent. SpectroCoin accepts Bitcoin (BTC), Ethereum (ETH), NEM (XEM), and DASH as collateral. As expected, the highest LTV is available for Bitcoin and Ethereum. However, you should be aware that choosing a higher LTV also increases your interest rates, while a higher loan amount lowers them.
Withdrawals are allowed in EUR, USDT, BTC, ETH… The best part of SpectroCoin is the flexible range for loans — you can take advantage of loans ranging from 25 EUR up to one million EUR.
All loans can last a maximum of one year, with the option to extend at a higher interest rate if necessary. Interest is automatically charged on a monthly basis, while you can repay the loan whenever it suits you.
BlockFi
BlockFi is a one-stop solution for buying, selling, or lending cryptocurrencies. You can expect up to 8.5% APY on various cryptocurrencies, where you will earn on a monthly basis. There are no hidden fees or minimum balance requirements to worry about on BlockFi. You can store all your crypto assets in one place and make sure you earn even more.
If you urgently need cash, you can borrow funds from BlockFi by pledging your crypto assets as collateral. You can borrow money at a 4.5% APR. Opening an account on their platform is very straightforward, making it suitable even for complete beginners.
According to users, the best thing about their platform is that it is the ideal choice for people of all levels of expertise. If you are a beginner, you can expect complete information about cryptocurrencies from the service managers. On the other hand, you can get support for your questions. The security system at BlockFi is top-notch due to regular upgrades to protect your assets.
Celsius
When talking about lending and borrowing cryptocurrencies, Celsius is also a very well-known platform. By lending cryptocurrencies on the Celsius network, you can earn up to 17% APY. You don’t have to pay any hidden fees, whether it involves borrowing, lending, or transferring crypto coins. Another great thing about Celsius is that it can be found in both web and app formats.
You can expect up to 17% APY, which will be paid into your account every week. Regardless of which cryptocurrency you lend on the platform, you will see options for excellent returns. Additionally, if you choose to earn APY in the CEL crypto token, you can expect up to 25% higher payouts.
When you visit the Celsius website, you can find a calculator to see how much you can earn based on the cryptocurrency you select and the duration you enter into the calculator. If you need urgent financing, you don’t have to sell your cryptocurrencies, because you can pledge them as collateral and easily borrow funds from Celsius at one percent APY interest.
Conclusion
If you need money and already have some cryptocurrencies in your portfolio but don’t want to sell them, borrowing could be a suitable alternative worth considering. Crypto loans can be cheap and fast, and often do not require a credit check. Furthermore, if you have digital assets that you intend to hold for a longer period of time, lending them through a crypto interest account could be an excellent way to increase their value.
Before you get involved in any side of crypto lending, it is extremely important to understand the risks, especially what can happen if the value of your cryptocurrency drops quickly and significantly. If you are considering lending cryptocurrencies in any form, make sure you weigh the pros and cons and all other options before making a decision.
Don’t miss out!
If you are interested in learning more about cryptocurrencies themselves, we invite you to read other articles on our website, which can be found in the Cryptocurrencies section. You can also join us at a free webinar where we will talk about how to earn with cryptocurrencies. You can register at this link: https://zannekrep.com/brezplacno20/. We are not financial advisors. All information regarding cryptocurrencies is accepted at your own responsibility. Do your own research as well.
