Cryptocurrencies are enjoying their growing popularity as they are being globally recognized. Recently the market cap of crypto crossed the figures of 3 trillion dollars. And 16% of this belongs to Americans who showed great interest in the trade and exchange of this emerging currency. It is about forty million people who are stepping into virtual currencies, visit website.
However, the majority of these currencies contain a highly fluctuating nature if traded in the short term. For example, Bitcoin, the most valuable cryptocurrency easily tradable via Bitcoin Trading Software, reached its maximum value in 2021 but lost all of its perks at the beginning of the current year.
There exist some crypto users who are not worried about the short–term fluctuations of crypto prices because they are long-term planners. These types of crypto users often utilize their cryptocurrencies as collateral for loans.
What Is Crypto Lending?
It is a process to deposit cryptocurrencies given to the borrowers to get interest payments from them. The lender receives interest payments in the form of digital currencies, which are deposited and are usually made over a period ranging from one day to 30 days.
The lending platforms can be categorized into two types, Centralized Crypto Lenders and Decentralized Crypto Lenders. Both the platforms offer high-interest rates to the lenders and demand collateral deposits from borrowers to provide them with crypto loans.
How Does Crypto Lending Work?
A crypto loan resembles a traditional loan as both of them use collateral, one uses digital assets, and the second uses any other security to back the loan. An individual who wants a crypto loan mortgages his digital holdings as security and repays the loan amount gradually. Multiple crypto exchanges and crypto lending platforms grant this type of loan. Hold On For Dear Life (HODL) is a common denominator of most crypto-related internet-based platforms.
The ownership of collateralized digital assets remains with you, but you lose certain rights. For instance, you are unable to utilize these assets for trading and exchanging. In addition, if the value of your cryptocurrencies declines significantly, you may have to repay much more than you borrowed in the event of loan default. People come toward crypto loans due to the rewards they offer, and they do not have any intention of trading or investing their digital assets in the future.
Types Of Crypto Loans
Collateralized Loans
These are the most reputed crypto loans and demand crypto deposits as a mortgage to grant loans. The majority of crypto lending platforms need over-collateralization, which indicates that borrowers are granted limited access to the deposited collateral (usually less than 90% of the value of the loan).
The LTV (loan-to-value), interest rate, and the risk of a margin call are directly linked to each other. An increase in LTV increases the interest rate and the risk of the margin call.
Uncollateralized Loans
These loans are not much known, but they resemble personal loans. In uncollateralized loans, borrowers are required to fill out loan applications, and then they get authentication or validation of their identity and wait for the approval of being creditworthy to repay the loan amount. Due to the absence of collateral, these loans are highly-risky because, in case of default, there is nothing to liquidate.
Flash Loans
Their name suggests that these are instant loans. Flash loans exist at crypto exchanges and use the same transaction for borrowing and repayment. These are extremely-risky loans to cash the arbitrage opportunities of the market by purchasing a digital asset at a low price and immediately selling it at a relatively high price.
Pros Of Crypto Lending
- Crypto loans are cheaper than personal loans, and you can avail of them at an interest rate of less than 10%.
- You can get the amount of loan ranging from 50% to 90% of the value of your portfolio.
- Crypto Lending is speedy and takes a few hours to process the loan.
- It is a good option for people with low credit scores because there is no credit check.
Cons Of Crypto Lending
- The sword of margin call is always hanging there.
- There may be a risk of attacking Smart Contracts.
- Diversification of portfolios in the case of crypto loans enhances the attached risks.
