Last Updated on October 17, 2022 by
When people ask, “what is crypto lending’, most people think it is only about stacking up crypto loans to make payments or satisfy an urgent need. Although crypto lending involves those things, it is so much more.
Cryptocurrency lending enables you to take full advantage of everything cryptocurrencies offer without taking aggravated risks, either as a lender or borrower.
Here, we answer the common question “how does crypto lending work,” and discuss the best crypto loan use cases.
What is Crypto Lending?
Cryptocurrency lending entails taking up crypto assets on credit and furnishing interests in return. In essence, it involves someone borrowing cryptocurrencies for a specified duration from a person who owns them and is willing to lend. In turn, the borrower pays a stipulated interest per time and returns the loaned assets at the end of the credit period.
How Does Crypto Lending Work?
There are 2 (or 3 parties) involved in a cryptocurrency lending transaction. First, there is the borrower who presents collateral to get the credit and intends to use the crypto assets for whatever purpose. There is the lender who owns fallow crypto assets and wishes to earn returns. Then, there is the cryptocurrency lending platform that facilitates the transaction between these parties.
To better understand the process, let’s make an illustration. First, there is X, who wishes to get crypto assets to invest in a certain metaverse project. Then, there is Y, who owns those assets lying fallow in their wallet. They are wary of the volatility that happens to crypto assets and is worried that the assets may be worth less than their current value after some time.
However, there is a way through which Y can protect against the volatility and potential fall in prices while earning an assured percentage of the value of their assets without risking much. This is through all cryptocurrency lending. A crypto lending platform takes the assets from Y and gives them to X, who furnishes collateral beforehand.
What to Keep in Mind With Crypto Loans
As in any investment transaction, cryptocurrency lending poses risks to both the borrower and lender.
First, there is the risk of over-collateralization on the borrower’s part. Crypto assets fluctuate, and a borrower’s collateral value may change tomorrow. To ensure they are protected, the lender may demand additional collateral if there is a sudden drop in the collateral value. In short, as your collateral drops in value, you will need to provide more collateral.
For the lender, there is no insurance on the loan, and as such, you can lose all the amounts invested, especially if you do lending through a centralized platform.
The Best Crypto Lending Use Cases in 2022
Primarily, crypto loans give the borrower access to credit for whatever purposes and enable the lender to get stable returns on their crypto holdings using such platforms as CoinRabbit.
However, there can be more beneficial use cases for the investor (lender) and the borrower. These include:
Making Money on a Bull Run
The crypto market often experiences general bull runs, in which case several crypto assets rally simultaneously, as we saw in 2021. You can take advantage of the price rallies by borrowing crypto assets from others, making it possible for you to own several assets at once. Thus, when these assets increase in price, you can sell and pocket decent profits.
Portfolio Diversification
There are no assurances in the crypto markets, and no one can certainly predict assets that will generate massive returns. Similarly, being invested in one or a few assets can hurt your portfolio if the assets experience a massive nosedive.
The only way to increase your chances of making huge profits and to protect huge downside losses is to be into as many assets as practicable. You can easily enlist several crypto assets into your portfolio by taking out loans on them.
Convert to Fiat
Do you want to take advantage of any investment opportunity that involves fiat payment? Or do you have a product you want to purchase in fiat currencies? Crypto loans are an excellent way to get credit for your fiat spending.
One good reason you should consider a crypto loan over fiat credit is that they can be much cheaper. For example, the average credit card interest rate is around 20%, whereas you can get a crypto loan for as low as 1.2% per month.
Thus, when next you need to purchase a laptop or invest in that ETF, a crypto loan may be your best option.
Unlock Stablecoins Power
You can take on crypto loans in the form of stablecoins and then take advantage of the bountiful benefits derived from using stablecoins.
First, you can use them as safe-haven assets. There is so much volatility happening in both crypto and stock markets, and then fiat currencies globally are having their values eroded by inflation. You can take advantage of the stability of stablecoins to protect yourself against fluctuations and uncertainties.
Surprisingly, you too can lend the stablecoins out and earn decent returns as interest. These returns can be as high as 10% per annum against the 2.15% that you get from your fiat savings account.
Finally, you can use them to facilitate cross-border remittances. Do you want to send money to another continent? Stablecoins present the perfect channel.
Use Crypto for Payments
If you want to make seamless, cheap, and stress-free transactions, you can use cryptos that you secure via cryptocurrency lending.
There are several benefits of paying with cryptos. First, they are seamless as there is a complete absence of any intermediaries. As long as you and the recipient have access to an internet connection, you can carry out payments.
Then, payments happen fast. For example, the average bank transfer in the US can take up to three days, while most crypto payments happen in less than 10 minutes.
If you run a business, you need a service that makes accepting crypto payments ultra-easy. NOWPayments is that service. In just a few minutes, you can set up your merchant page to start accepting payments in crypto. You get to take advantage of multiple coins, best fees and instant payout.
Support Your Favorite Crypto Projects
Several innovative projects are happening in the NFTs, metaverse, DeFi and other spaces. However, they almost always have their native tokens. You can support these projects by taking on loans for these tokens to be a part of these groundbreaking initiatives.
Bottom Line
Crypto lending has several beneficial applications. However, regardless of your purpose for taking on a crypto loan, it is extremely important that you only borrow from the best cryptocurrency lending platform. Whether or not you succeed as crypto lending may be entirely determined by the platform from which you borrow. As such, you should only sign up with lending providers such as CoinRabbit.
