What Is Crypto Lending?
Crypto enthusiasts are often encouraged to “HODL” their assets — keeping them safe in a wallet until the price of their chosen currency appreciates. But just like you’d feel uneasy about leaving your cash sitting around in a bank with a low interest rates, a common question is this: how can you get your digital currency to grow?
This is where crypto lending comes in. Not only can it enable savers to receive interest on their stash of Bitcoin, but it enables borrowers to unlock the value of their digital assets by using it as collateral for a loan.
When investing, one of the biggest challenges can be cashflow — and there’s nothing worse than having to raid the capital you’ve got tied up in assets for short-term costs and lack liquidity.
How crypto lending works
A cryptocurrency-backed loan uses digital currency as collateral, similar to a securities-based loan. The basic principle works like a mortgage loan or auto loan — you pledge your crypto assets to obtain the loan and pay it off over time. You can get this type of loan through a crypto exchange or crypto lending platform.
While you retain ownership of the crypto you’ve used as collateral, you lose some rights, such as the ability to trade it or use it to make transactions. Also, if the value of your digital assets drops significantly, you may end up owing back much more than you borrowed should you default on the loan.
People may consider crypto loans because of the benefits they provide and because they have no intention to trade or use their crypto assets in the near future. The acronym HODL, which stands for hold on for dear life, is a common refrain in crypto-focused online forums.
Benefits of cryptocurrency lending
Compared with traditional secured loans, crypto loans have unique features that can make them appealing for some crypto enthusiasts:
- Low interest rates: While they’re generally not as cheap as mortgage or car loans, crypto loans are an inexpensive alternative to personal loans and credit cards. You can often get a crypto loan with an interest rate below 10 percent.
- Loan amount is based on asset value: In many cases, you can borrow up to 50 percent of your portfolio value, but some exchanges go as high as 90 percent.
- Choice of loan currency: Depending on the platform and what you need, you can generally get the loan funds in the form of U.S. dollars or select cryptocurrencies.
- No credit check: Crypto lending platforms and exchanges typically won’t run a credit check when you apply, making it an incredibly attractive financing option for people with poor credit or no credit history.
- Fast funding: Once you’re approved, you can get your loan funds in as little as a few hours.
- Ability to lend crypto: Many crypto exchanges offer “interest” accounts that allow you to lend your own digital assets and receive a high APY — sometimes upward of 10 percent — in return.
Things to consider before engaging in cryptocurrency lending
There are some clear benefits to using your digital currency to secure a loan. But because of the nature of secured loans and cryptocurrency, there are also some downsides:
- Margin calls: A margin call occurs when the value of your collateral drops below a certain threshold and the lender requires you to increase your holdings to maintain the loan. In some cases, the lender may even sell some of your assets to cut your loan-to-value ratio. Because cryptocurrencies are extremely volatile in the short term, the chances of this happening can be high.
- No access to your assets: As long as your loan has an outstanding balance, you can’t access your holdings to trade or transact. This can be a significant problem if the price of the currency drops significantly or you need cash in a hurry.
- Repayment terms can vary: These loans usually function like traditional installment loans, and depending on the crypto lending program, you may have less than a year to pay back what you borrowed. In other cases, you can create your own repayment schedule. With shorter repayment terms, it’s crucial that you know beforehand whether you can afford the payments.
- Not all digital assets are eligible: Depending on the crypto lending platform you use, you may need to exchange your currency for an eligible asset. This may not be preferable if you want to hold onto your specific asset and it doesn’t qualify as collateral on any platform.
- Interest account funds aren’t insured: If you’re lending your own digital assets, the funds in a crypto interest account aren’t insured like the money in your bank account. So if the exchange fails, you could lose everything.
- Interest account withdrawals can be slow: You can generally request a withdrawal from your crypto interest account whenever you want. But depending on the platform, it could take several days for those funds to be released so you can use them. This can be very damaging if the value of your assets drops quickly and you can’t trade them.
