Crypto lending allows you to take out a loan using cryptocurrency as your collateral assets. You could also be on the other side of the loan and be the lender to earn returns from the interest on the loan.
Crypto lending can be done through a decentralized finance (DeFi) platform, which connects lenders to borrowers and vice versa. DeFi platforms facilitate peer-to-peer lending (also called p2p crypto lending) and have no middle person. Alternatively, you can borrow through a centralized platform like Binance, BlockFi, and Nexo.
Crypto traders who have a large sum of currency and don’t plan to sell any of their assets can grow their returns by loaning money. Cryptocurrency lending is ideal for people who want to hold their assets, sometimes referred to as "hold on for dear life" (HODL).
How do crypto loans work?
If you own cryptocurrency, let’s say Bitcoin (BTC), that you don’t want to sell, but you also believe it's unwise in the short term to continue holding it, you can use it as collateral for a loan. Typically, if you use Bitcoin or another fiat currency as collateral for a loan, you receive the loan in a stable coin currency or U.S. dollars. For example, a Stablecoin currency is pegged to an external value, like the U.S. dollar. This way, you are still receiving your loan in a digital currency, but it is less volatile than the fiat currency you use as collateral. The particular DeFi crypto lending platform will determine what your options are in terms of receiving the loan. You retain the ownership of the crypto you used for collateral, but you cannot use it for transactions. Once you pay back the loan, you regain the ability to trade and execute transactions.
Is crypto lending safe?
When you borrow or loan through centralized platforms, you must meet specific regulations and requirements. Centralized platforms use these regulations to ensure your digital assets are protected. Your transactions are publicly recorded using blockchain technology.
When using DeFi lending, the platform utilizes smart contracts to facilitate lending and protect your assets. The smart contacts are open to public view; you deal directly with the lender or borrower. Because you deal directly with another crypto trader, there are no requirements you need to meet, unlike with a centralized platform.
Major investors back crypto lending platforms like BlockFi, but your crypto assets are not insured, so you do take on potential risks with a lack of insurance.
What are the upsides to Bitcoin lending?
Crypto lending started for a reason: Many people felt bank loans' interest rates or their accessibility was undesirable.
No credit check
Unlike a traditional financial institution loan, a crypto lending platform requires no credit check. This can be helpful with people with a poor credit score or no credit who still want to obtain a loan.
Low-interest rates
Crypto interest rates tend to be relatively low compared to personal loans or credit cards. If you want to avoid extremely high fees for a loan that may be difficult to qualify for at a bank, crypto loans offer an alternative.
Fast approval
Once you're approved for a crypto loan, you should receive funds in a short amount of time, usually a few hours. This is one of the major reasons many believe crypto loans to be more efficient than traditional bank loans.
Choice of currency
You can obtain a loan with a variety of digital assets as your collateral, for example, Bitcoin or Ethereum (ETH), and you can receive your loan in several ways (primarily either in Stablecoins or USD).
Higher loan amount
Your loan is based on how much your crypto assets are worth, and with crypto lending, you can often receive a loan that's more than half your portfolio value.
Downsides to crypto lending
While crypto lending may have advantages compared to traditional bank loans, you also assume other risks and other downsides.
No insurance
Your crypto holdings are not insured with crypto lending, even on centralized crypto exchanges. Compared to a traditional savings or bank account, your money is insured in the rare chance your bank fails. Crypto lending, however, doesn't offer this safety net. If you are the lender and the loan falls through, you could potentially lose everything in the loan.
Margin calls
A significant risk with cryptocurrency is its volatility. If your assets depreciate in value past the loan-to-value ratio (LTV), your lender could issue a margin call. If a margin call happens, you would have to put up more collateral to keep your loan.
Slow withdrawals
If you want to withdraw your crypto from an interest account, it may take a while for you to access your account. This can be risky with crypto’s volatile nature because you could miss an opportunity to sell your crypto before a crash.
No access
If you use your crypto as collateral, you'll be unable to access the currency (even though you still own it) until you pay off your loan.
Varying payment schedules
Your repayment schedule may vary from others, so you should check your loan terms to be sure you can make payments on time.
Four popular crypto lending platforms
In comparison to each other, crypto lending platforms have many important differences to understand when considering which is the best for you.
Aave
Aave is a decentralized platform, but it allows you to access flash loans or fixed-rate loans. Aave also accepts many different currencies as collateral.
BlockFi
BlockFi is one of the leading centralized platforms and, as mentioned earlier, is backed by established financial institutions in the United States.
Oasis Borrow
Oasis Borrow supports DAI Stablecoins, but the most intriguing feature of this platform is the ability to put your own crypto as collateral to mint DAI Stablecoins. You can either pay back your loan by minting a set number of DAI or by repaying the loan traditionally.
Nexo
Nexo is a centralized platform and is popular because it offers the rare feature of insurance. Nexo also accepts many currencies.
The bottom line
Crypto lending offers an alternative to traditional loans that allows both borrowing and lending. With crypto lending, you have many different platforms to choose from, each with its own advantages and disadvantages to best meet your goals and risk tolerance. Crypto lending is also a way to capitalize on your assets without selling them, especially if you are in the crypto market for the long haul.
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