What Is Crypto Lending and How Does It Work?

Last Updated on October 17, 2022 by

One of the most interesting qualities of cryptocurrency is how there are multiple avenues to make money. Investors seeking to earn substantial profit can do so without engaging in trades. In this article, we discuss cryptocurrency lending, including its history, how it works, the perks of lending your crypto, and a variety of other things you need to know.

Table of contents

• History of Cryptocurrency Lending
• How Does Cryptocurrency Lending Work?
• Why Should I Lend My Crypto?
• What are crypto lending use-cases?
• How to Choose the Right Crypto Lending Platform?
• What should I keep in mind regarding crypto lending?
• What are the risks of crypto lending?
• CoinRabbit, the Easiest Way to Borrow Crypto 
• In-summary

History of Cryptocurrency Lending

Cryptocurrency lending originated in 2020, during the early days of the coronavirus. Due to the effects of the pandemic, banks cut interest rates, forcing people to find alternative ways to earn on their money. In response to this, the crypto market emerged with a lending solution. There, investors could take advantage of attractive rates while retaining full ownership of their cryptocurrency.

Today, crypto lending is pretty much the norm. Rather than the timeworn method of HODLing to make a profit, asset owners can put their tokens to work. Borrowers can also expand their portfolio, gaining more from the tokens they collateralized.

How Does Cryptocurrency Lending Work?

A straightforward way of understanding crypto lending is to consider the format of bank loans. There, your bank uses money from your savings account and rewards you with a certain amount of interest. Similarly, cryptocurrency platforms lend your assets to borrowers who pay interest on the loans they take. Part of this interest is returned to you. Unlike traditional banks which pay a very minute sum, you earn a lot in interest. Lenders can earn as high as 8 to 12% interest on their funds.

In even simpler terms, three parties exist in a crypto lending relationship in CeFi. The first is the lender who has assets they would like to earn on. The second is the borrower who needs funds for an endeavor. While the third is the platform that can link both individuals with each other.

In taking a cryptocurrency loan, be sure to remember that they are always overcollateralized. This means that due to the volatile nature of the crypto space, you put up more collateral than the loan you intend to take. Your loan will often be no more than 70% of your collateral.

Why Should I Lend My Crypto?

The following are reasons why you should lend your crypto:

• Lending enables you to access high interest rates, something that you do not get in traditional banks
• It shift from the old method of HODLing which may end up not yielding results. With lending, you out your unused coins to work
• Also, you retain ownership of your cryptocurrency. The arrangement allows you to lend it to the platform without losing proprietorship as you would when you sell.

What are crypto lending use-cases?

Cryptocurrency lending has several common use-cases: reinvesting, short-selling, diversification, daily purchases, and many more:

• Reinvesting — you can borrow your holdings against stablecoins and spend received funds to stack more of the same currencies you hold. As the market grows, you sell your accumulated assets and payoff the loan while keeping the profits due to price difference (bullish market case);
• Short-selling — you can borrow your stablecoins against chosen assets (for example Bitcoin or Ethereum) and sell received cryptocurrencies at the current exchange rate. As the market drops, you buy the same amount of Bitcoin or Ethereum cheaper to payoff the loan while keeping the profits due to price difference (bearish market case);
• Increase your passive income – take out a crypto loan and add the released funds to earn even more passive income;
• Diversification — you can borrow your holdings against stablecoins and spend received funds to diversify your portfolio and buy more of different currencies;
• Daily purchases — you can borrow your holdings against stablecoins, exchange them for fiat and spend received funds for your regular needs such as rent or travelling;
• Pay in crypto – release additional funds for different crypto purchases with the help of merchants. Buy food, clothes, services without converting your crypto to fiat;
• Join any Metaverse – you can engage in your favorite Metaverse project by taking out a crypto loan and buying any token supported inside this Metaverse. Just imagine – still hodling your assets and using all perks of crypto Metaverses at the same time.

How to Choose the Right Crypto Lending Platform?

To choose the right platform, you need to understand its types. There are centralized finance platforms and decentralized ones. Centralized finance, otherwise called CeFi, are platforms that basically require you to submit your personal details. They hold your private keys and retain substantial control over your transactions.

Decentralized platforms, on the other hand, operate on a permissionless basis. You have full control over your account and execute processes using applications built on the blockchain. While DeFi platforms are liberal, CeFi offers you the benefit of regulatory oversight.

Centralized Finance Platforms Compared

Decentralized Finance Platforms

What should I keep in mind regarding crypto lending?

There are several crypto lending parameters that should be understood and constantly kept in mind: LTV, APR, loan time frame, liquidation and liquidation price.

• LTV (Loan-to-value) is a ratio of the loan to the ratio of the collateral. In terms of cryptocurrency lending loans are always overcollateralized which means you receive only a part of your collateral value;
• APR (Annual percentage rate) is the interest rate for the whole year applied on a cryptocurrency loan;
• Time frame defines how many time you have to payoff your cryptocurrency loan;
• Liquidation is a process of selling your collateral to cover the lender’s expenses;
• Liquidation price is a price when the collateral is being sold to cover the lender’s expenses. It is determined before taking the loan.

What are the risks of crypto lending?

While being a powerful tool crypto lending as any other financial activity has several risks strictly connected with it:

• Your collateral always has a liquidation price. You should closely monitor cryptocurrency price fluctuations and be aware of it. It is the ONLY reason of losing your collateral within crypto lending services;
• Keep in mind the LTV ratio. For example, if LTV is 30% it means that the price of Bitcoin used as collateral should drop by 30% before being sold;
• Do your own research. As any other financial activity crypto lending should be fully understood before being considered;
• Do not lend out cryptocurrency you plan to cash out soon. Cryptocurrency lending should be considered for a mid-term or long-term;
• Do not use highly volatile digital assets as collateral (SZC, XRUNE);
• Take everything moderately like any other financial activity. Use only those funds that are ok to potentially be lost.

CoinRabbit, the Easiest Way to Borrow Crypto

At CoinRabbit we created a comprehensive solution to provide you with the best crypto lending experience. 

Easy to Use

The process of lending crypto at CoinRabbit is very simple and easy. Literally, a few clicks to get your funds. You don’t have to browse through the whole website to learn what to do.

Fast and Furious

It takes under 10 minutes to receive your USDT/USDC loan. Forget about waiting for your funds for hours.

No KYC

We do not identify our clients, we do not know where you are from and who you are. We just need your phone number or email. In most cases passing KYC is not needed (required for the cases when the funds can’t pass AML security level).

In-summary

This article has covered all the important bits about cryptocurrency lending. But to ensure that you get the best value, research adequately on the platform’s fee structures and the token you wish to invest in. This will determine your profits in the long run.

Crypto lending solutions became a great tool to adopt any cryptocurrency market conditions, let it be a growing, dumping, or stable market, and provide new ways of increasing your wealth.

Reconsider your financial activity and choose between crypto-backed market loans and Earnings to amplify your holdings and make any price swing more convenient.

Not financial advice. Do your own research and take everything moderately.

Crypto-backed loans have their own risks that should be taken respectively.