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How does a crypto loan work?

How does a crypto loan work? 

How does a crypto loan work?

Over the years, we’ve seen various cryptocurrencies rise and fall, a large number of people have become wealthy as a result of trading cryptocurrency and then there’s also another set of people that have suffered one loss or the other due to the volatility of cryptocurrency.

The one secret most of these wealthy people wouldn’t divulge to you is how they take ‘calculated’ risks. Emphasis on the calculated because the best way to achieve this is by obtaining crypto loans – that way, they get to explore the value of their crypto assets without selling at all.

Now quickly, let’s get into the meat and potatoes of leveraging the value of your crypto asset by using it as collateral to obtain a cryptocurrency loan.

What is Cryptocurrency Loan?

We have Bitcoin to thank for coming into play in 2009, thereby changing the way transactions are being made online with its introduction of digital currency – this has brought about Decentralized Finance, which means its operations aren’t controlled by a central entity like traditional banks.

Just as it is when obtaining normal loans where the bank is the lender and you are the borrower, it works the same way when you want to obtain a cryptocurrency loan – the cryptocurrency lending platform is the lender, while you are the borrower.

Also, bear in mind that for you to obtain crypto loans, you need to pledge your cryptocurrency asset as collateral. 

Are Crypto Loans Important in the Markets?

Cryptocurrency lending is rapidly becoming an important part of the cryptocurrency space, and even though it hasn’t gained enough popularity, it can still have an impact on how assets are being valued and priced in the markets.

An important element that fuels cryptocurrency lending is its desirable interest rates – making people realize that they can earn higher returns on their crypto assets rather than just letting it sit idle in their wallets.

Why crypto loans are important in the market?

How Crypto Lending Works?

For you to understand it better, let’s paint a scenario:

David bought about $20,000 worth of Bitcoin and his long-term strategy is to keep his crypto asset for at least 6 months (which means he wouldn’t be able to withdraw until after 6 months) and he’s currently low on cash but he needs about $4,000 for an emergency expense. 

Mind you, selling his crypto asset wouldn’t be a good idea because the value of Bitcoin might’ve gone lower than it was when he initially bought it, and even if its value happened to be higher, selling it ruins the 6 months strategy he had in place.

Obtaining a loan from the bank is completely ruled out because this is an emergency and getting a loan from a bank takes days not to mention the interest that would be incurred on the loan.

The best solution? Using his crypto asset to borrow cryptocurrency from a cryptocurrency lending platform. That way he doesn’t have to ruin his 6 months strategy by selling his crypto asset.

All that would be required of him is to pledge a certain amount of his crypto asset to get the $4,000 fiat currency he’s in urgent need of.

Using a loan-to-value ratio (LTV) of 50%, he’d have to pledge $8,000 worth of Bitcoin to get $4,000 in stablecoins or fiat currency.

When he’s ready to repay the cryptocurrency loan he obtained, all that is required of him is to send the $4,000 + the interest incurred during the loan period and he’d be granted access to the $8,000 crypto asset he pledged initially.

That’s how effortless it can be to obtain crypto loans from cryptocurrency lending platforms within minutes instead of waiting days when using traditional banks.

How crypto lending work?

Crypto Lending Best Practices

  1. Take time to research

When you’re looking for a cryptocurrency lending platform to make use of, you must know what you’re getting into. Find out what they have to offer, how secured their website is (the platform you want to pledge your crypto assets must show they have strong website security). 

Also, check online for reviews about the platform – to ensure they have a good track record so you don’t fall victim to scams.

  1. Guaranteed safety of asset

Ensure the cryptocurrency lending platform has your crypto asset secured – that irrespective of what happens, you know you’ll get your cryptocurrency back.

How Can I Start Borrowing Cryptocurrency?

There’s a long list of cryptocurrency lending platforms on the internet to obtain crypto loans from but I’d encourage you to use CoinRabbit especially if you want to obtain your crypto loan with the speed of light and you feel you’d need a longer period for repayment of the loan.

CoinRabbit offers value for your crypto asset at a low-interest rate of 5% APR and you can pay it back at any time you want – that’s an unlimited loan period for you.

Before you can get access to crypto loans, you would be required to pledge your crypto asset at a loan-to-value ratio (LTV) of 50% like the scenario that was painted earlier for you.

So whether you’re a newbie or a crypto enthusiast, the steps to borrow crypto currency is pretty easy.

  1. Ensure you have the crypto asset you want to use as collateral ready (it can be Bitcoin, Ethereum, etc. depending on the acceptable crypto collateral on the crypto lending platform).
  1. Visit any cryptocurrency lending platform, you can use CoinRabbit. Some might require you to sign up, CoinRabbit doesn’t require registration that’s why it’s recommended.
  1. Input the amount of crypto asset you’re willing to pledge as collateral and your loan amount would be calculated for you using the loan-to-value ratio (LTV) the platform is offering.
  1. You would be required to provide a wallet address where you want the loan sent to and then you’d have to send the exact amount of your pledged crypto asset to an address that would be made available.
  1. After the verification has been done to confirm your pledged collateral, the cryptocurrency loan would be sent to your provided wallet address.

Credit checks are not carried out when requesting crypto loans, although some cryptocurrency lending platforms require standard Know Your Customer (KYC) verification.

So as long as you have the required amount to serve as collateral, you’re eligible to borrow cryptocurrency from a crypto lending platform.

Types of cryptocurrency lending platforms

Cryptocurrency Lending Platforms: Types and Descriptions.

We have two types of cryptocurrency lending platforms which are Centralized Finance (CeFi) and Decentralized Finance (DeFi) and they both offer a wide range of benefits such as flexibility, access, speed, and security of crypto assets.

  1. Centralized Finance (CeFi) lending platform

People are generally used to the idea of borrowing from a central source, they feel safer in a way. That’s what Centralized Finance is all about, the lending and borrowing operations are being controlled by a central entity which could be a website or a company.

There is more flexibility in this lending platform as the company tends to offer juicy interest rates. I mean, juicy interest rates while making the experience of obtaining crypto loans easier? Sounds like a good offer to me.

  1. Decentralized Finance (DeFi) lending platform

The existence of a middleman as in the case of Centralized Finance is ruled out completely. All financial transactions are being controlled by a set of protocols instructed to be executed on a blockchain network (usually Ethereum blockchain network) and this is known as a smart contract. 

The work of the smart contract is to execute dynamic transactions with multiple factors pre-programmed. These factors may include the loan amount, duration, collateral, interest rates, etc.

What are the Risks of Crypto Loans?

  1. Fraud 

It’s important to note that while searching for a cryptocurrency lending platform to use, be careful not to fall victim to fraud due to the offer a scammy crypto lending platform is proposing to customers. 

There’s a popular saying you should have at the back of your mind – “If it seems too good to be true, then it probably is”.

  1. System breakdown

This is most likely to occur in a Decentralized Finance (DeFi) lending platform, where there might be an error in the algorithm causing the set of protocols to be affected or a situation where someone will be able to hack the system thereby causing a loss in the crypto assets involved in the transaction.

Conclusion 

Although there are some risks involved in cryptocurrency lending, it is important to note that the rewards of obtaining a cryptocurrency loan far outweigh the risks.

Post Author: Diana Kelley

Hey! I'm Diana, CoinRabbit's blog manager. I want our blog to be the most useful and interesting!
Also, I love rabbits.