What is Crypto Lending? A Complete Guide

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Introduction

If you are into crypto, I am sure you know how pivotal it is to hold onto your bitcoin investments while their prices rapidly depreciate in the financial markets. Indeed, people who are interested in cryptocurrencies are often advised to hang on to their investments until a market gain occurs in the cryptocurrency of their choice.

But even if this is the situation, you may well not feel comfortable keeping your money in your wallet, particularly if the prices are falling at an alarming rate.

When you reach this point, you should be thinking about methods to assist in the growth of your virtual currency so as to ensure that you suffer from minimum losses. One of the effective approaches that you may use in order to accomplish this is via the practice of a crypto loan. However, what precisely is meant by the term “crypto loans,” and what would it entail? Do you know why they are so beneficial for crypto owners like yourself? Let’s figure it out.

What are Crypto Loans?

In order to understand cryptocurrency loans, you must first understand exactly what they are. In practice, the majority of individuals who own crypto commodities search for choices that will allow them to lock their resources for a prolonged period of time until the prices of their assets increase.

But what if, rather than allowing your crypto holdings to gather dust in accounts, you could really do something with them that would increase their value? In situations like these, you really have to seek the most acceptable practices and tactics, like crypto lending, to extend the worth of your cryptocurrency possessions. “Crypto lending” is one greatest way to do so.

You should now have a solid understanding of the fundamental concept behind crypto loans, which is that they are a kind of decentralized finance through which investors may lend their virtual currencies to numerous borrowers as per their preferences. These loans provide participants with the opportunity to receive interest in exchange for their lending practices; these payments may also be referred to as “crypto dividends.”

As we all know, cryptocurrency is a widely used method of exchanging money, introduced in 2009. It likewise creates a plethora of investment options by introducing the prospect of cryptocurrency loans, which may maximize the cost of your digital currencies. Moreover, it should be noted that the valuation of cryptocurrency properties may be increased via the use of cryptocurrency-backed loans even if the assets themselves are not sold.

You may choose a real-world scenario to illustrate why getting a crypto loan at this moment is a good idea in comparison to other financial options. Imagine that you now own 20 Bitcoins and that you have the intention of generating a constant income stream from them.

As a result, you wisely decide to deposit them in a cryptocurrency lending facility. Can you imagine the amount of extra income you could now have? Isn’t it crazy how the interest could add so much to your revenue? However, do keep in mind that the percentages of interest offered will change from concept to implementation.

There must be a good number of you who are concerned about the ramifications of the question “Are crypto loans safe?,” particularly when taking into consideration the unpredictability of cryptocurrency assets.

Nevertheless, you also should keep in mind that crypto loan services give better possibilities of reimbursement or recovery in case of losses. It is possible for investors to get their money back if borrowers default on their loans. This is because cryptocurrency lending services often require borrowers to put up anywhere from 25 to 50 percent of the loan’s value as security.

Investments of collateral made by borrowers may increase the likelihood of recovering cryptocurrency loans, making the market more secure for shareholders. So, it’s a safe bet, to begin with.

How Are Cryptocurrency Loans Processed?

A third-party act as an intermediary in transactions involving crypto loans, bringing together borrowers and lenders. The lenders constitute the very first party participating in crypto lending. They might well be blockchain enthusiasts who wish to increase the production of the resources, or they could be those who keep onto digital currencies in the hope that their value will increase in the future.

The second participant in the cryptocurrency lending network is the location where the operation of lending and borrowing takes place. The final and the most pivotal role in the procedure involves the borrowers, who are considered the third party since it is they who will be receiving the money. It’s possible that they are individuals looking for money or enterprises who are in need of financial assistance.

The process of lending cryptocurrency is broken down into the following steps:

  • The borrower submits a request for a cryptocurrency loan on a centralized marketplace.
  • As shortly as the network accepts the borrower’s application for a loan, the borrower is required to stake the cryptocurrency collateral. The borrower wouldn’t have the option to retrieve back the interests until such time as he is in a position to pay back the whole of the loan.
  • Lenders will instantaneously finance the loan if they use the framework to do so, which is a procedure that shareholders will not be able to see.
  • Investors are guaranteed to get their interest payments on a consistent basis.
  • If the borrower is successful in paying off the entire debt, then he will be able to get the cryptocurrency collateral that he had requested.

The procedure of lending cryptocurrency generally works like this; however, every site has its own unique method for doing so. Therefore, when you pick an online crypto lending forum, always make sure you thoroughly study the steps involved and understand it perfectly. Given any queries, never hesitate to ask the respective platforms for assistance.

Types of Crypto Lending Platforms

The terms “decentralized” and “semi-centralized” programs are used to allude to the two most frequent kinds of bitcoin lending platforms, respectively. Platforms that involve decentralized cryptocurrency lending are totally reliant on the technologies such as smart contracts or blockchain for their operative mechanisms and account handling. But in the other extreme, semi-centralized platforms allow the use of blockchain technology or smart contracts at the operational level only.

Perhaps, semi-centralized networks trace the development of a traditional centralized organization and have a leadership order that is quite comparable to that organization. The following are a few of the most prominent instances of essential variations in the two cryptocurrency lending platforms:

Decentralized Crypto Lending Platforms

Compound and Aave are two instances of decentralized cryptocurrency lending systems that have gained a lot of popularity recently. Both of these systems have garnered substantial recognition in the DeFi field because of their distinctive capabilities. The complex functions as a financial marketplace, enabling the user to contribute cryptocurrency and profit from the interest earned on funds borrowed from other participants.

On the other side, Aave enables users to increase their interest income from digital currencies by using crypto loans.

Semi-Centralized Crypto Lending Platforms

The crypto lending platforms that are semi-centralized adhere to a monitoring system that is centralized. Examples of systems that fall within the category of semi-centralized lending are Nebeus and YouHodler.

YouHodler, for instance, employs the services of a conservator for the loans. In addition to the valuable services of a custodian for solely security purposes, they also benefit from improved chances of asset recovery and increased safety for cryptocurrency transactions.

Benefits of Crypto Loans

There is a broad range of cryptocurrency lending options, which make use of the higher leverage that provides cryptocurrency with excellent collateral and an actual fantastic way of making money for lenders. These alternatives consider taking advantage of the increased liquidity that helps make crypto a wonderful reward generator.

Lending a single cryptocurrency asset via a unified platform presents traders with the least complicated choice. There are disparities in the rates offered by various apps and for the various currencies. On a DeFi platform, for instance, you may earn roughly 12 percent on stablecoins but only 1 percent on ETH or WBTC, but on a controlled forum, your BTC and ETH can gain approximately 4 percent.

You could likewise opt for rate arbitraging. For those who aren’t sure what it is, rate arbitrage is a technique that includes acquiring a commodity in one marketplace where the worth is cheaper and then renting this on another network in which the prices are higher.

This way, you can earn a handsome revenue on your loaning services. However, this method accompanies some risks too, which I believe are pivotal for you to know. Your profits might be completely wiped out by swings in the variable interest rate, which could even cause you to incur a loss if you choose to further continue this method.

Many owners of cryptocurrencies also take advantage of the possibility offered by DeFi protocols to sell their cryptocurrency holdings without triggering a taxable circumstance. To accomplish this, the virtual currency is put up as collateral for the loan of currency that is tied to the dollar and thus allows the borrower to avoid paying interest or taxes on the transaction.

There is also the possibility of generating money through cryptocurrency lending technologies via the use of lightning loans. You may borrow the freest liquidity and utilize your unsecured loan to make huge profits instantly. The loan must always be reimbursed within that transaction chain; thus, if you are unable to repay the whole amount of the loan, then no portion of the operation will be done.

Leverage is made accessible via borrowing money, purchasing more capital, and raising the cost of the debt until you approach the allowed maximum, which is yet another possibility made possible due to the rising attractiveness of borrowing cryptocurrencies coins. So, let’s assume you provide Bitcoin (BTC) as collateral and afterward sell the dollar-pegged stable coin that you acquired in exchange for further Bitcoin (BTC).

You are essentially placing a long position on your collateral monetary source in the hope of generating a return if and when the price of BTC increases. You end up with a large profit, but the only thing you have to give back to the procedure is the initial cash amount. Even while there is a possibility that you may lose all of your money if the price of bitcoin drops, there is also the possibility that you could make very profitable trades.

Serving as a DeFi liquidator is the last of your revenue-generating choices to consider. If you choose to go on this pathway, you will need to have a certain level of technological expertise. This is because you will need to complete a lot of complex mathematical algorithms. This step would help determine which loan repayments haven’t reached the minimum collateral cut-off.

Once known, you will need to revalue the securities so that you can return monies to the original lender. Although forming the bots could take some time, the charges you could demand providing this service would be rather large.

The Risks Associated with Crypto Lending

Cryptocurrency is a highly alluring endeavor, and individuals from all over the world have significantly benefited from its participation in it. On the other hand, as we are all clearly aware, there are a few dangers that are connected to it.

In a similar vein, crypto loans come with their own set of inherent risks to consider. The creator of Kinetix Financial Planning, Travis Gatzemeier, adds that one of the disadvantages of cryptocurrency loaning is that if values decrease, then you may need to commit more money. “That is going to be the greatest negative side of crypto,” he says. You can’t borrow money against it since it’s not a typical or reliable asset.

As a result, as Travis pointed out, taking out loans exposes one to a significant amount of danger. If the valuation of the coin that has been used as collateral declines to a value that is below a specified level, then this might contribute to the borrower having to liquidate their assets and losing all of their cash.

Before putting money into the pockets of a cryptocurrency peer-to-peer lending network, another concern that has to be taken into consideration is the possibility of a security vulnerability occurring. Hackers are able to take advantage of specific flaws in the smart contract technologies that oversee the flow of cash via the service. The year 2020 saw a number of high-profile events of this sort, which resulted in losses of millions of dollars. When a huge sell-off occurs and the interest rates drastically fluctuate, there is an additional risk associated with the lack of liquid assets.

Lastly, due to the unregulated nature of the cryptocurrency industry, which is still in its early stages and is only slowly being legitimized in multiple jurisdictions, the tax repercussions of lending virtual currency tokens are unknown, and the prospective legal consequences are thus always up in the air.

Perhaps, this uncertainty is because the cryptocurrency industry is still in its young phases of development, and it would take some more time to strengthen its grip across different nations of the world.

However, by putting your money as an investment form on a blended platform that has the safety of centralization along with the benefits of high returns, which were primarily only available via DeFi lending mechanisms, you’ll escape many of the pitfalls of crypto lending altogether.

In spite of this, if you intend on becoming involved with crypto loans, you should make sure that you are aware of both the benefits and the drawbacks associated with it.

Conclusion

When compared to more conventional forms of financing, cryptocurrency lending certainly stands out as a forward-thinking alternative. Taking banks out of the picture absolutely paves the way for the introduction of the prospect of numerous advantages. Indeed, cryptocurrency lending is one of the available methods used by many investors to get their grips tightened on crypto-assets. These loans have been around for quite some time, though, so you can rely on them.

To add on, with the advent of the decentralized finance transformation, crypto lending has seen a surge in popularity that is projected to continue to increase in the years to come. Thus, it is completely up to you to decide whether or not you want to receive a cryptocurrency loan. However, as seen, there are many benefits for everyone interested in borrowing them, and you should totally avail them.

Begin learning more about crypto-backed payments and the ways in which they have the potential to transform the financial industry. The business of decentralized finance is still in its infancy; thus, keep an eye on this sector as its products mature, grow more widespread, and become available to everyone.


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