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Many cryptocurrency loans work as a form of peer-to-peer lending. The borrower uses their cryptocurrency as collateral to take out a loan, while the lender puts up their own cryptocurrency to serve as a loan and earns some of the interest that the borrower pays.
In this way, cryptocurrency users can be both borrowers and lenders, and either get a loan or earn interest on their cryptocurrency as desired.
While the basic principles remain the same, different platforms work in different ways.
Different platforms work in different ways, but the general principle is that of peer-to-peer lending. Borrowers use their cryptocurrency as collateral to get loans, while lenders deposit cryptocurrency, which is used to fund the loans.
Most platforms screen borrowers and issue the loans themselves, then simply share the profits with the lenders. This creates an experience similar to the way banks offer loans and pay interest to savings account holders.
Others act as marketplaces where borrowers and lenders can come together and browse each other’s offers.
In many cases, a platform will have its own native token, which can be optionally used to get preferable rates, discounts or other bonuses.
One of the most important features of these platforms, and one of the reasons they can offer relatively high earnings for lenders, is the fact that they use cryptocurrency as collateral with a typical LTV ratio of around 50%.
This means that there’s plenty of collateral to go around, even in the event of a crypto market drop. If a borrower drops below their agreed LTV ratio, their collateral can be quickly and easily liquidated. As an added bonus, it can almost always be sold incrementally as needed, at fair market rates, without any kind of depreciation beyond the price change.
This helps reduce, and theoretically completely eliminate, the risk of default from borrowers. It’s essentially just using one type of money as collateral for a loan of a smaller amount of another type of money. This safety means that these types of platforms don’t necessarily have to spend as much time and money conducting credit checks, screening borrowers, hiring debt collectors, chasing defaulted loans, setting up payment plans and doing all the other things lenders have to do.
In fact, it can even be used as a framework for completely automating the entire lending process, which some platforms are doing, to reduce costs even further.
The loan to value (LTV) ratio is how much money someone can borrow with their collateral.
For example, with a 50% LTV, someone with $10,000 of Bitcoin could use it as collateral to borrow $5,000.
They are obligated to meet the minimum LTV standards, and lending platforms will typically reserve the right to liquidate portions of the collateral to maintain the agreed LTV ratio if they don’t.
For example, if someone uses $10,000 of Bitcoin to borrow $7,000 – the maximum amount possible with a 70% LTV ratio – and then Bitcoin prices fall by 40% so that they only had $6,000 of collateral, the borrower would need to top up with another $4,000 worth of cryptocurrency to get back to $10,000 and maintain the agreed LTV ratio.
If they don’t, the lending platform may be able to sell enough of the borrower’s collateral to bring the loan back to the agreed 70% LTV ratio.
In this way, higher LTVs are riskier but let borrowers access more money, while lower LTVs are safer but don’t let borrowers access as much money. Similarly, it can be safer for borrowers not to borrow the maximum amount their collateral allows, to avoid needing to top-up or risk having their cryptocurrency sold after a price drop.
Conversely, if cryptocurrency prices rise this allows borrowers to take out more money, within the limits allowed by their collateral.
To start lending or borrowing cryptocurrency, follow these steps.
Step 1. Compare crypto lending platforms.
In addition to rates, you’ll want to look for a platform that supports your desired (crypto)currencies, and has minimum deposit amounts that suit your needs.
If you only want a small loan, for example, not all platforms will be equally useful. Similarly, if you as a borrower want to better secure the value of your holdings against market forces, you may want to look for a platform that supports stablecoin deposits. If you’re a borrower, you should make sure you know what will happen in the event of major price swings, and whether you can keep your collateral funded.
You should also compare platforms on reputation, security and overall trustworthiness by looking at user reviews, terms and conditions, whether they meet any licensing or compliance obligations, how they secure funds and other factors.
Step 2. Sign up for an account.
You will typically need to register for an account on these platforms before you can lend or borrow.
This may involve providing personal details and verifying your identity.
Some platforms may also require trust scores or credit scores as a way of evaluating your creditworthiness. This, and your borrowing history on the platform itself, may affect the loan terms and conditions you can access.
Step 3. Start lending or borrowing.
Once you’ve found a suitable platform, signed up and gotten verified, you can start using its services.
In some cases, this may simply be making a deposit and earning some passive income from your new “cryptocurrency savings account”.
In other cases it may be taking out a fiat currency loan with Bitcoin as collateral, or trading.
Different platforms have different features, so it can be worth exploring.
One of the best ways to spot a cryptocurrency scam is to be wary of any offer that seems too good to be true.
But do any of the offers on this page qualify? To stay safe and avoid scams, it’s important to consider what “too good to be true” looks like in this context.
As previously mentioned, cryptocurrency is an extremely effective type of collateral for loans because it’s essentially a type of money in its own right, and these platforms will typically offer LTV ratios of only 30% to 70%.
This means that, when a system is properly set up and managed, there’s practically zero risk for lenders.
This lack of risk would typically translate into extremely good rates for borrowers, but as you can see, that hasn’t happened here. Instead, it’s turning into higher returns for lenders.
When considering this, it’s reasonable to relax one’s assumptions of what a good rate looks like.
Another reason these rates may seem too good to be true is because we’re comparing them to typical savings account rates of today, which have dropped sharply in recent years. But in the 80s and 90s, it was normal for bank customers to earn interest in the double digits from fixed term deposits.
To an extent, these interest earnings aren’t especially high. It’s just that the typical rates of today are so low.
A promise to double your money every year is too good to be true, but there’s nothing inherently unrealistic about 10% per annum in simple interest.
And are these offers really as good as they seem? In some cases, the rates for lenders that are shown on this page may be the upper end of what’s possible, and conditions may apply in order to get those rates.
If you look at the fine print, you may realize that many of these platforms aren’t as good as they first appear. For example, a platform that offers up to 18% per year will likely only pay that as simple interest, not compound, while requiring users to stake a certain amount of the native platform token.
Both borrowers and lenders have different pros and cons to watch out for when using these platforms.
Some of the risks to be aware of when using cryptocurrency lending platforms, as either a lender or a borrower, include:
The nature of these risks means there’s a chance of losing all the funds you commit to a platform, no matter how reputable and reliable. It’s important to be aware of this, and to avoid over-committing.
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