One of the most common ways of increasing your wealth within the cryptocurrency world is the so-called “HODL” — the process of keeping the assets safe in a wallet until the price appreciates. Easy to remember, hard to execute since it usually takes significantly longer for assets to “pump” than expected. With that said, another question arises: how can you make your digital currencies grow?
This is where cryptocurrency lending appears. It provides lenders with an opportunity to earn interest on their holdings and helps borrowers to unlock the value of their digital assets by using it as collateral for a loan.
Why should I consider a crypto loan?
As previously mentioned, cryptocurrency loans unlock the value of your digital assets by using it as collateral for a loan. If you have a long-term view for your investments and have no intention to sell your assets it allows you to maintain ownership of your funds while gaining access to the liquidity.
In other words, you can use the assets you have (that you do not plan to sell) to release the funds that can be utilized for reinvestments, buying other digital assets or daily purchases.
What is cryptocurrency lending?
Cryptocurrency lending is an investment form with two main involved parties: the lender and the borrower. The lender provides the assets needed for the loan (usually stablecoins or fiat) at a selected interest rate while the borrower uses cryptocurrency assets as collateral to receive the loan. This collateral can be used later to cover the lender’s potential expenses.
Easy as that — the lender sends the loan, the borrower deposits the collateral, and receives the loan.
What are crypto lending use-cases?
Cryptocurrency lending has several common use-cases: reinvesting, short-selling, diversification, or daily purchases.
- 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);
- 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.
How can I start lending my crypto?
To start lending cryptocurrency you should choose the type of lender you would like to work with. There are several different options available:
Platforms and Exchanges
Custodial platforms or exchanges like Binance or Coinbase can provide lending services. These services are centralized and act as a middleman, controlling the agreement between you and the borrower. Before starting working with them and proceeding with lending you would have to send your cryptocurrency to their platform.
Usually, these two options require you to create an account first, and pass Know Your Customer (KYC) procedure, meaning you’d have to provide your private information before proceeding with lending out digital assets.
Decentralized Finance (DeFi) protocols can also allow you to lend out your cryptocurrencies without a middleman (Compound or Aave). A smart contract would be used for this case to ensure that lending would be handled correctly. This smart contract will automatically make transactions once certain predetermined requirements are met.
Within these services you would have to send your cryptocurrencies to a smart contract when lending, meaning in exchange you will receive a proof of being the owner of these assets.
On the other hand, DeFi lending is limited to a one blockchain due to the fact that smart contracts are being used. Most often these protocols support only ERC20 tokens (Ethereum blockchain).
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
We do not identify our clients, we do not know where you are from and who you are. In most cases passing KYC is not needed (required for the cases when the funds can’t pass AML security level).
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 bull & bear 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.