The crypto market has expanded exponentially in recent months, and investors see cryptos for what they are worth. However, cryptos were only limited to payments and money transfers until recently. There was still room for discoveries in which the decentralized money could ace. So, it paved the way for automated lending and borrowing of cryptocurrencies. What made crypto loans extremely popular is how it is a straightforward way to generate passive income.
If you have accumulated a good amount of crypto assets but are thinking of selling them because you need physical money, have a look at the bitcoin price chart. Giving away Bitcoins will mean you cannot enjoy the benefits when the price surges. So, the concept of lending bitcoin is gaining extreme popularity.
What are Crypto Loans?
Crypto loans are built around a simple concept, loaning money against digital assets. Borrowers present cryptocurrencies as collateral to get loans in fiat currencies or stable coins. They can use any form of crypto like Bitcoin, Ether, or Litecoin, which will work as security in case there is a failure of repayment. You can use any british bitcoin profit to access the loans.
This can also happen the other way around when borrowers use fiat money to borrow crypto assets. This opens an opportunity for lenders to make use of their idle crypto assets by giving them to borrowers in return for interest.
Once the lender and borrower come to a mutual agreement on the interest rate, the loan processes, the borrower receives the loan amount in his bank and pays EMIs to the lender monthly. After the amount is completely repaid, the lender releases the collateral.
If the lender had provided crypto assets on the maturity of the loan, he could retain the ownership. This is a great way for holding onto the assets and earning something out of them.
Where can you lend and borrow cryptocurrencies?
ZebPay, Vauld, and similar cryptocurrency exchange platforms have introduced the option to lend and borrow crypto coins. The annual returns you generate depend on which cryptocurrency you are lending. For Bitcoin, it is up to 3%, Ethereum and Dai earn 7%, and Tether earns 12%. For different platforms, the interest rates may vary.
However, to lend your cryptocurrency, the mandatory rule is depositing your coins to the exchange wallet. There are no options to link external wallets on such platforms.
When the loan matures, they deposit the principal amount along with the return in your trading wallet. You have the option to withdraw your cryptocurrency any moment before maturity, but that will cost you a penalty on the returns.
Crypto Loan Vs. Bank Loan
People invest in cryptocurrency with a futuristic goal. They plan to hold on to their assets in the hope of a surge in price. But storing the crypto coins in the wallet is not only an unproductive way to own assets but also limits their supply in the market. The best way to make use of these assets is using them as collateral to take loans that can be utilized for personal benefits.
- Interest
For lending your cryptocurrencies, you can obtain interest returns as high as 8%, whereas, for fiat currencies, it is only 1%. As much as it is beneficial for lenders to earn passive income, borrowers enjoy a similar advantage when they buy crypto-assets from one exchange and sell on another to benefit from margin trading.
- Accessibility
Considering the number of unbanked adults in the world, crypto loan sounds like a game-changer. There is no requirement for a bank account to lend or borrow cryptocurrencies. The process is simple and less time-consuming than banks. The transaction does not have to be limited to a specific location as the work is done online.
A bank loan is usually sanctioned only after analyzing credit score, which is why people in need might not necessarily have access to such help. People with low or non-existent credit scores suffer from this system and end up paying high-interest rates or have their loan applications rejected. But crypto loans are accessible to anyone who possesses cryptocurrencies and are willing to lend them in return for interest.
- Transparency
The loaning terms are kept very flexible for crypto owners. Some platforms have made the process easier by keeping no minimum monthly payments. You can repay the whole amount at maturity.
You can closely track your fund movements because of the transparency blockchain technology provides. Although personal details are not revealed on the blockchain, every movement of the transaction can be tracked. In case of any neglect, the details will be available for inspection as they are immutable.
Use Cases of Crypto Lending
The best way to clear the concept of crypto lending is to understand how the market and platforms operate.
- Single asset lending platform
The most basic way to enter the market is by lending. Before moving further, compare the rates across platforms with the help of trackers. The easily available interest rate tools will find the optimum return for the assets you are willing to lend. Decentralized platforms offer high-interest rates for stable coins (7%-15%), whereas cryptos like Ethereum and Bitcoin earn lower rates (0%-1%). On centralized platforms, the rates are contrastingly different, allowing crypto assets to earn between 2% and 6%.
- Non-taxable liquidity
Investors often buy cryptocurrencies to diversify their portfolios. But selling them for raising money becomes a taxable event. When in need of money, use the crypto assets as collateral to obtain fiat loans instead of selling them to avoid such inconvenience. This way, you get a chance to liquidate the asset for covering emergency expenses while maintaining your investment exposure and avoiding tax on the gains.
- Arbitrage trading
Arbitrage trading allows you to earn interest without owning cryptocurrency. It is a simple way of borrowing crypto from one platform and lending it to another. For instance, you can borrow Bitcoin at a variable rate of 0.50% from one platform and lend it at a higher rate of 5.50% on another platform to earn an annual profit of 5%. However, the risk in arbitrage trading is that the rates can shift invariably, eliminating your gains.
Another interesting feature offered by only a few platforms is the option to select your own lending and borrowing terms. You can specify the asset, duration of the loan, and interest rate. Apart from the crypto-stable coin and crypto-fiat borrowing options, crypto-crypto opens additional opportunities. The advantage of customizing your criteria is being able to predict how your interest rate arbitrage would perform.
- Margin trading
Simply put, Margin Trading is a form of a multiplied loan. If you want to invest in cryptocurrency, you can borrow the capital from an exchange with leverage. This allows the trader to enlarge their capital that can be used for margin trading.
For instance, you can use any cryptocurrency like Ethereum as collateral to borrow stable coins (that are backed by dollars) and then sell the stable coins to buy more Ethereum. During this period, if suddenly the price of Ethereum surges, you must pay back only the original price. The marginal profit is what you gain.
This kind of trading bears high risk, and if the price of Ethereum falls instead of rising, the exchange will hold the right to liquidate your collateral to pay the lenders.
- Flash Loan
Flash loan simplifies the process of borrowing by not asking for any collateral in return. Anyone can sign up for this loan, and it takes only a few minutes to process. It has completely decentralized the process of taking a loan.
However, the repayment is a whole different story. The condition to borrow money from a protocol is that you must repay the money within the same transaction block. Only then, the platform will successfully close the loan. If you are unable to return within that time frame, the original transaction will be reverted. Every transaction remains on the blockchain, and that lets the network go as far as it wants to revert the initial transaction.
Future of Crypto Loans
Cryptocurrencies hold a high status as collaterals. They liquidate easily, and that is a key part of the crypto-lending ecosystem. In case of any failure in payment, the money can be quickly earned back. With the growth of the crypto industry, the lending ecosystem can change the prospect of the financial world.