Lending occurs when someone allows another person to borrow something. Money, property, or another asset is given by the lender to the borrower, with the expectation that the borrower will either return the asset or repay the lender. In other words, the lender gives a loan, which creates a debt that the borrower must settle. In this article, we will help you understand the mechanics of crypto lending.
What Is Crypto Lending?
Crypto enthusiasts are often encouraged to “HODL” their assets — keeping them safe in a wallet until the price of their chosen currency appreciates. But just like you’d feel uneasy about leaving your cash sitting around in a bank with low interest rates, a common question is this: how can you get your digital currency to grow? This is where crypto lending comes in. Not only can it enable savers to receive interest on their stash of Bitcoin, but it enables borrowers to unlock the value of their digital assets by using it as collateral for a loan.
When investing, one of the biggest challenges can be cashflow — and there’s nothing worse than having to raid the capital you’ve got tied up in assets for short-term costs and lack liquidity. Crypto lending is the process of depositing cryptocurrency that is lent out to borrowers in return for regular interest payments. Payments are made in the form of the cryptocurrency that is deposited typically compound on a daily, weekly, or monthly basis.
Participating parties: All crypto lending transactions have two distinct parties: The borrower and the lender. It is for the borrower to deposit crypto assets as collateral to secure the loan from the lender. The arrangement works to mutual advantage, as the borrower receives an immediate loan in return for their crypto assets while the lenders earn interest on the amount released as a loan. If the borrower defaults, they dispose of the underlying crypto assets to realize their money. All action via Binance, Bitfinex, Poloniex, Gate.io or Separate Lending Platforms including CeFi and DeFi.
- Users can choose to lend their idle coins to increase the number of coins.
- Often platforms will have many options for lending time to diversify options for lenders.
- The biggest risk for lending is that the price of that coin is reduced during the lending process & the interest does not make up for the shortfall caused by the coin’s price drop.
How Crypto Lending Works
Just like a securities-based loan, a cryptocurrency-backed loan collateralizes digital currency. Basically, it resembles a mortgage loan. You give hold of your crypto assets to get the loan and repay it over a predetermined time. These types of loans can be obtained through a crypto lending platform or a crypto exchange. Though you still retain ownership of the collateralized crypto, you forego the right to make transactions using digital coins.
Crypto loans come across as a viable option because of several advantages such as low-interest rates, choice of loan currency, lack of credit check, fast funding and the ability to earn passive income on your crypto that is otherwise lying idle. Moreover, you can lend your own digital coins and receive a high APY (more than 10%) on several crypto platforms.
The crypto lending process happens in a few steps:
- The borrower goes to a platform and requests a crypto loan
- The borrower stakes the crypto collateral as soon as the loan request is accepted by the platform. Until he is able to fund back the entire loan, the borrower will not have the opportunity to get back the stakes.
- Using the platform, the lenders will automatically fund the loan, which is a process that investors cannot see.
- Investors will receive regular interests as payments
- When the borrower manages to pay off the whole loan, he will get back the crypto collateral he wanted.
Types of Lending
There are several types of cryptocurrency loans available: Centralized vs. Decentralized
- Centralized Finance, or CeFi, loans are custodial crypto loans where a lender has control over your crypto during the repayment term. Most crypto loans fall under the CeFi umbrella.
- Decentralized Finance, or DeFi, loans rely on smart contracts to ensure you adhere to the loan requirements. You retain control of your crypto assets, but a lender can take automatic actions against your account if you default or miss a payment. DeFi crypto loans can have higher interest rates than CeFi.
Some The Best Crypto Lending Platforms
Crypto.com – Lend Stablecoins to Earn up to 14% APY: Crypto.com, which is home to some of the best crypto lending rates in the market for stablecoins, as well as offering the best crypto credit and debit cards with great crypto rewards. To give you an example of how competitive this popular altcoin exchange is, Crypto.com offers an APY of 6% on stablecoins like USD Coin, Tether, TrueUSD, and Paxos Standard. And, best of all, to earn this APY of 6% – there is no requirement to lock your tokens up for a minimum amount of time.
BlockFi – Specialist Crypto Lending Platform With Top Security Controls: BlockFi can be described as a specialist crypto lending platform, insofar that digital asset investments and loans stand at the heart of what the provider offers. In terms of generating yields on your digital tokens, the amount on offer will depend on two core factors. This covers the specific token that you decide to deposit and the size of your investment.
For example, if you’re looking to earn interest on Ethereum, you can earn 5% at BlockFi. However, this is only payable up to the first 1.5 ETH that you deposit. Anything above this figure – up to 5 ETH, will attract a lower APY of 1.5%. And, investments above this figure will pay just 0.25%. With this in mind, BlockFi is arguably one of the best crypto lending platforms for smaller investments.
Nexo – Top Bitcoin Lending Platform for Low Fees: Nexo is a hugely popular crypto lending site that not only offers a large number of supported tokens but highly attractive APYs. In a similar nature to Crypto.com, Nexo allows you to increase the amount of interest earned when you stake its native digital token. For example, if you’re looking to earn a yield of Bitcoin, you can earn an APY of 6% without staking.
But, by staking Nexo, this APR is increased to 8%. If you’re looking to diversify into other digital currencies, you earn 9/11% on ATOM, 14/16% on MATIC, 16/18% on FTM. Stablecoins like USDT, GBPX, and EURX are also supported with various APYs – most of which are attractive when compared to the industry average. Regardless of which digital token you decide to earn interest on – and whether or not you wish to stake Nexo, no lock-up periods are in place.
Benefits of cryptocurrency lending
Compared with traditional secured loans, crypto loans have unique features that can make them appealing for some crypto enthusiasts:
- Low interest rates: While they’re generally not as cheap as mortgage or car loans, crypto loans are an inexpensive alternative to personal loans and credit cards. You can often get a crypto loan with an interest rate below 10 percent.
- Loan amount is based on asset value: In many cases, you can borrow up to 50 percent of your portfolio value, but some exchanges go as high as 90 percent.
- Choice of loan currency: Depending on the platform and what you need, you can generally get the loan funds in the form of U.S. dollars or select cryptocurrencies.
- No credit check: Crypto lending platforms and exchanges typically won’t run a credit check when you apply, making it an incredibly attractive financing option for people with poor credit or no credit history.
- Fast funding: Once you’re approved, you can get your loan funds in as little as a few hours.
- Ability to lend crypto: Many crypto exchanges offer “interest” accounts that allow you to lend your own digital assets and receive a high APY — sometimes upward of 10 percent — in return.
If you need money and have sizable crypto holdings but don’t want to sell them, crypto lending can be an alternative worth considering. Crypto loans can be inexpensive and fast, and they often don’t require a credit check. Also, if you have digital assets that you plan to hold onto for a long time, lending them out via a crypto interest account could be an excellent way to maximize their value.
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DISCLAIMER: The Information on this website is provided as general market commentary, and does not constitute investment advice. We encourage you to do your own research before investing.