Crypto Loans: How do they work?

The world of crypto-currencies has come a long way since 2008, when it was dreamed up by the mysterious creator, Satoshi Nakamoto, in the paper for Bitcoin. The journey has been nothing short of astronomical, with cryptocurrencies providing financial freedom to people all over the world. Over the past five years, cryptocurrencies have seen much more adoption than in previous years, with thousands of altcoins, projects, technologies, and more. coming to market. They innovate the financial space year after year. Cryptocurrency loans are one such innovation where users can access loans against their cryptocurrency assets known as Crypto Backed Loans, and Crypto Loans without Collateral (Flash Loans), etc.

Here, we bring you everything there is to know about cryptocurrency-backed loans and how you can get loans against cryptocurrencies, as well as the benefits and risks associated with it.

What is a cryptocurrency loan?

In order to understand what a crypto loan is, it is important to understand what a conventional loan is and how it works. A conventional loan can be of two types: Secured or unsecured. Secured loans require collateral or collateral to protect against the loan taker’s inability to repay the loan. Unsecured loans do not require collateral or collateral, rather they are granted on the basis of the CIBIL index or the credit rating of the loan taker.

Thus, a crypto loan is also similar to the conventional loan in that the underlying security or collateral needed to secure the loan is not a physical asset, but rather a cryptocurrency asset. There is also another type of crypto loan, known as a flash loan, which is not backed by any assets and is managed by smart contracts. But when talking about a cryptocurrency loan, it means a secured cryptocurrency loan.

Image credit: BlockFi

There are many platforms that act as intermediaries to secure cryptocurrency loans, such as BlockFi, Celsius, Aave, Compound, and even centralized exchanges like Binance.

Advantages of cryptocurrency loans

The next big question that comes to mind is whether getting a crypto loan is a good idea or not. When it comes to cryptocurrency loans, there are multiple options available to any user. They can choose to be either the borrower or the lender. Each of these roles has its pros and cons, such as:

earn interest

As a lender, there is a huge opportunity for people to earn interest on the loans they give. It’s an easy way to earn regular passive income by lending your crypto assets, stablecoins like USDT, or cash.

Low interest rate

For borrowers, crypto collateral lending serves as a very lucrative prospect as the interest rates are very low. For example, BlockFi offers an annual percentage rate of 4.5% on the loan. Many other platforms also have a very low interest rate on their cryptocurrency loans when the loans are secured for the long term.

No need for banks

Cryptocurrency lending empowers people in a way that takes away the power to approve or deny loans from banks and other financial institutions. Although the amount of the majority of loans secured by crypto-assets is usually above $10,000, it is still very lucrative and gives people access to funds that they would take a long time to obtain through conventional methods.

Fast and secure

The main problem with conventional loans is that they take a long time and not everyone can be guaranteed to get a loan. With cryptocurrency loans, the time it takes to get a loan is minimal and almost anyone can get one.

Ownership of cryptocurrency assets

If a person holds a large number of crypto assets and needs money, they do not need to sell their crypto assets. Instead, she can obtain cash loans by keeping her crypto assets as collateral and recovering them after repaying the loan.

Disadvantages of cryptocurrency loans

Although cryptocurrency loans might seem very lucrative and the sensible thing to do when it comes to getting loans for people dabbling in the crypto world. There are some inherent drawbacks associated with these loans. Some of these disadvantages are:

High minimum loan amount

When it comes to cryptocurrency loans, the loan amount is usually high. So it is all the more risky for people to think about getting one. Also, in order to get a cryptocurrency loan worth $10,000, platforms such as BlockFi require a minimum holding of cryptocurrencies worth $20,000 in order to get loan approval. .

Short repayment period

Most cryptocurrency loans have a short repayment period ranging from 12 months to 3 years. Compared to conventional loans, this period is shorter and puts much more pressure on the borrower.

The volatile nature of cryptocurrency prices

The crypto asset against which a loan is secured may experience massive price volatility during a loan period. If the price of the crypto asset drops below the threshold level set by the lender, there is a risk of a margin call. If a margin call occurs, the borrower may need to deposit a larger amount of this asset in order to meet the loan requirements. If the borrower fails to do so, the platform may choose to sell your assets to recoup its losses.

Crypto assets are locked

Once a loan is secured by a crypto asset, it is locked for the entire term of the loan. During which, the borrower can no longer access his assets and use them for trading or other purposes. In case the price of your asset goes to the moon, you will not be able to sell them. Likewise, if the price drops significantly, you will not be able to sell them to cut your losses.

Conclusion

While cryptocurrency loans are very easy to secure and have a lot of inherent benefits while giving financial freedom to people across the world. The mechanism and the platforms that offer them are still at a very nascent stage. Also, the volatile nature of the crypto-assets that form the backbone of cryptocurrency lending makes it a very risky business. Even if you are a lender who wants to earn interest by lending your cryptocurrency assets, it is a much better idea to hold your assets on CoinStats Wallet and earn interest on your holdings. And on top of that, you can manage all your crypto assets across different platforms using the CoinStats Wallet and app.

67% of retail investor accounts lose money when trading CFDs with these providers. You should ask yourself if you can afford to take the high risk of losing your money.

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