Aficionados of cryptocurrency are often advised to “HODL” their assets, which means keeping them in a wallet until the value of their preferred currency rises. But you may still wish to increase your assets worthwhile they are locked in a secure vault. Isn’t it? This is where cryptocurrency lending and borrowing comes into play. It not only allows savers to earn interest on their Cryptocurrency holdings, but it also allows borrowers to unleash the value of their digital assets by using them as security for a loan. Find out more about crypto lending and borrowing techniques and whether they are safe for us below.
What is crypto lending or borrowing?
Virtual currency empowers crypto investors to raise loans in cash or digital currencies by using their coins as collateral. Cryptocurrency lending allows the lender to keep ownership of the virtual currency. Nevertheless, the coin supplied as security cannot be traded or transacted with during the lending period. Crypto investors who want to HODL their digital currencies and do not intend to sell them anytime soon might lend the crypto assets and earn income during that timeframe.
A crypto loan is a secured loan that may be obtained via a cryptocurrency exchange or a crypto-lending platform. The cryptocurrency loan works similarly to a vehicle loan in that you use your house or car as collateral, but in this case, you employ your bitcoin to secure your lending cash. The rate of return is often referred to as ‘crypto dividends.’ That’s a straightforward method for crypto investors to make passive income by lending their crypto holdings.
How does crypto lending work?
In cryptocurrency loans, lenders and borrowers are linked through a third party, typically an open crypto payment platform. As a result, there must be three parties engaged in crypto loans: lenders, borrowers (asset holders), and lending portals: Lenders are those who seek to lend coins, altcoins, or cash in order to generate passive income from their crypto holdings.
The third-party platforms that link borrowers and lenders plus handle these transactions are known as crypto lending platforms. These platforms might be independent, decentralized, or centralized. Borrowers need loans for a variety of reasons and should utilize bitcoin or fiat assets as collateral to obtain funding.
Crypto Lending Rates
For crypto loans, every company has a distinct rate. As a result, the amount you expect in exchange for your deposit will be determined by the site you choose. Every crypto loan site has a distinct ROI, and there are also different hazards based on the platform. As a result, it is critical to explore several platforms in order to disperse the risks. This should allow you to diversify your assets.
In the case of crypto lending, a common annual return might be expected. It ranges from 3% to 8% for cryptocurrencies, while it ranges from 10% to 18% for stablecoins. Every investing platform has a different rate per coin. If you want to maximise your profits, you’ll need to choose a system based on the coins you own.
How to Borrow Cryptocurrency
To borrow cryptocurrencies, users must first select the appropriate platform. There are numerous sites that allow you to borrow cryptocurrency, but you must research through it until you discover a reliable one. Consequently, before you borrow a loan, you should first ensure that the platform is safe and legitimate. After you’ve found a trustworthy site, you’ll want to see if you can borrow the sort of the cryptocurrency you wish to lend.
It’s not like all cryptocurrencies will be available on every platform. You should also research the annual returns on the cryptocurrency you intend to lend. In comparison to regular loans, obtaining a crypto loan is quite simple. You will be given an amount of the loan depending on the cost of collateral you can provide. The loan-to-value ratio considers the loan amount first, followed by the value of the collateral.
Types of crypto-lending platforms
Centralized Finance Crypto Lending (CeFi)
These include institutions or businesses that manage the registration process for the customer, such as establishing KYC (Know-Your-Customer) and converting bitcoins and fiat money with a custodial mechanism in place to secure the assets. They are often more adaptable when it comes to creating alliances with other firms and arranging bespoke credit arrangements.
Margin lending is used by centralised crypto lending services to entice customers. They promise to increase the production of their crypto assets in a secure and simple manner. Moreover, as compared to decentralised crypto lending, they are more likely to give advantageous interest rates and terms to crypto lenders.
Decentralized Finance Crypto Lending (DeFi)
The lending and borrowing operations are delegated to a firm or an association of people in centralised crypto lending. It is managed by a set of guidelines in decentralised crypto lending, which is also known as DeFi. Smart contracts function as the basis for the algorithms, which automate the delivery of cryptocurrency loans and interest payments.
DeFi platforms are often non-custodial, do not need KYC, and solely accept cryptocurrency. The borrowing rates given vary based on market supply and demand, but they are often lower than the rates supplied by centralized platforms. DeFi is more open than centralized since the protocols are open to everyone and activities are documented on public blockchains.
How safe is crypto lending?
As is the case with most crypto lending platforms, they apply strict control measures and demand considerable collateral – up to 200 per cent of the lender’s value in the case of extremely volatile cryptocurrencies. Loans may be immediately liquidated when prices are falling under specific thresholds. Furthermore, loan facilitators may issue margin calls, asking borrowers to provide collateral. Nonetheless, owners should not rely on government insurance to shield them from damages. In crypto, there is no FDIC bank insurance or SIPC brokerage insurance. This sector is not as closely controlled as financial institutions or investment firms. Although lenders may be specified in terms of lending ratios and capital buffers, they may also take risks.