Cryptocurrency and blockchain technologies are transforming more parts of our life every day. Now that buying and trading cryptocurrencies have gone more popular, it is also hardly unexpected to see crypto lending coming into the picture. But what exactly is crypto lending all about?
Through this article, here’s everything you need to know about crypto lending, as well as some advantages and drawbacks to think about.
Definition
It includes taking out a loan with cryptocurrency as collateral. It is the same as acquiring a car or a home loan. Although you cannot acquire them through a bank, they may be found on DeFi platforms or crypto exchanges.
How to get a crypto loan?
A bank may provide you with a wide range of loans. In the same way, there are two types of crypto lending: custodial and non-custodial.
Custodial (CeFi) loans are those in which a central authority owns the collateral and the private keys. You will be unable to obtain your collateralised coins. Although acquiring a loan through a CeFi platform requires extra paperwork, the fact that it is regulated — and that a customer care person is only a click or a phone call away — may make these platforms more enticing to conventional investors.
On the other hand, non-custodial (DeFi) loans are based on smart contracts, which are present in Ethereum and other blockchains. They are contracts that go into effect when specific criteria are satisfied. Unlike CeFi loans, there is no intermediary or financial regulator on DeFi loans. Thus there is no need to go through a KYC verification process. Furthermore, these loans are unable to lend fiat cash directly. Instead, you receive stablecoins, which can be exchanged for cash.
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What are the benefits involved in crypto lending?
Source:cnbc.com
- There is no credit check. When you apply for a cryptocurrency loan, most crypto lending companies and exchanges will not conduct a credit check, making it a very appealing financing alternative for those with credit issues or no credit history.
- You may earn money by lending your digital assets. Some cryptocurrency exchanges may provide up to 10% in return.
- Crypto loans are a less expensive option. While not as cheap as mortgages or auto loans, a crypto loan with an interest rate of less than 10% is common.
- There are no delayed funds. Once accepted, you may get your loan cash in as little as a few hours.
Why are crypto lending rates so high?
Source:weforum.or
The simple answer to this question is that the demand for crypto lending services is currently outpacing the supply. In other words, there are more people looking to borrow cryptocurrencies than there are lenders willing to loan them out. This imbalance has driven up the average interest rate for crypto loans.
Of course, the high interest rates could also be due in part to the fact that crypto lending is still a relatively new industry. As more lenders enter the market and competition increases, it’s likely that rates will begin to fall. For now, though, borrowers can expect to pay a premium for the privilege of accessing crypto loans.
How about the things I should consider before engaging in crypto lending?
- There could be a possible technical risk similar to crypto trading. There is a chance that protocols will fail due to a technical issue or hacking. Because all DeFi activity is fully algorithmically regulated, this risk is slightly larger with non-custodial loans.
- Funds in a crypto interest account are not insured. If you lend your own cryptos, the funds in a crypto interest account are not insured like money in a bank account. As a result, if the trade fails, you may lose everything.
- Your lender may issue a margin call, requiring you to raise your holdings to keep the loan. This happens when the value of your collateral falls below a particular threshold. The lender may sell part of your assets to reduce your loan-to-value ratio. Because cryptocurrencies are so volatile in the short term, this is possible to happen.
- You will not be able to deal with your assets as long as your loan debt remains unpaid. This can be a major issue if the currency’s value falls dramatically or you want cash quickly.
Should I try crypto lending?
Looking at what we have learned about crypto lending, it seems profitable for all interested in engaging in this. Crypto lending could be viable if you need money but do not want to sell your cryptos. Just remember that if you are thinking about crypto lending in any form, make sure you weigh all of the advantages and disadvantages and all of your other choices before making a decision.
Can you make money lending crypto?
Source:as-coa.org
The short answer is yes, you can make money lending cryptocurrency – but it’s not without its risks.
When you lend crypto, you’re essentially loaning out your digital assets to another party in exchange for interest. The interest rate will vary depending on the amount of cryptocurrencies you’re lending and the duration of the loan, but it’s typically between 5-15%.
Of course, as with any loan, there is always the risk that the borrower may default on the loan and never repay it. This is why it’s important to only lend to trusted borrowers who have a good track record of repayment.
Another thing to keep in mind is that lenders are also subject to volatility risk – meaning that if the value of cryptocurrency goes down during the term of the loan, you could end up losing money overall.
All in all, lending crypto can be a great way to earn some extra income – but just be sure to do your research and only lend to those that you trust.
Conclusion
Cryptocurrency lending is a great way to make money from your cryptocurrency holdings. By lending out your coins to borrowers, you can earn interest on your investment without having to sell your assets. This is a great way to generate passive income and grow your portfolio over time. If you’re interested in exploring crypto lending, be sure to do your research and choose a reputable platform to get started.
