Crypto admirers often encourage everyone to keep their assets safe in their digital wallets until the price of their crypto coins increases. But, it is similar to the situation when you feel uneasy about leaving your money sitting in your bank account with a low-interest rate.
And this is where a question arises- how can you grow your digital currency? This is where crypto lending enters the scene. Now, what is crypto lending?
With crypto lending, you can not only receive interest on your stash of crypto coins, but it will also enable browsers to unlock the value of their digital capital by using it as collateral for a loan.
Over the past decade, Cryptocurrency has gained immense popularity as a new form of financial offering, and so following this, crypto-backed loans have also emerged. There are different types of cryptocurrencies that are digital forms of money. They are digital assets to purchase goods and services instead of traditional money. And blockchain is like a digital ledger that stores information about every cryptocurrency transaction.
Let’s know in detail about- what is crypto lending?
What Is Crypto Lending?
Crypto lending is a kind of decentralized finance that enables investors to lend their cryptos to various borrowers. By this, they will receive interest money in exchange, called “Crypto dividends.” Many platforms help you lend crypto and accept stable currency on top of cryptos.
Since crypto is becoming a famous payment method, it can be a great investment opportunity for you. The capital can get more value when you hold them without having any plans to sell them, which is what crypto lending will do for you.
For example, if you have 20 BTC and plan to get a steady passive income from them, you can deposit them into a crypto lending platform wallet. By this, you will receive interest every week or month. However, the interest rate can differ; it can either be between 3%-7% or go a bit higher, up to 17%.
In crypto lending, borrowers will have a chance to stake their cryptocurrency as a loan payment or security guarantee. The investor will be able to sell the crypto assets if the borrower doesn’t pay the loan money anymore, which means they can recover the losses.
Furthermore if you are interested you can also have a glance at How To Sell Bitcoin In India?
How Crypto Lending Works?
First, crypto-based loans are fully secured. Borrowers have to use digital assets as collateral for loans, just like a house or car for a mortgage loan. You might not use or exchange your crypto shortly, so this method will allow you to get money for expenses you need now without making any transaction with your digital currency.
You can find cryptocurrency-backed loans on the marketplace like Binance, BlockFi, and many more. For taking a crypto-backed loan, you have to first sign up on the platform of your choice and choose the desired loan amount. The platform will evaluate how much cryptocurrency is needed in the form of collateral; then, you will deposit the said amount and apply for the loan.
And once your loan is approved, you will receive the money. You will pay the loan balance plus interest for a designated period, although the majority of the platforms don’t have any penalties for paying off your loan early.
Benefits Of Crypto Lending
In the case of cryptocurrency lending, you don’t have to go through a credit check for qualifying crypto-backed loans, which makes it an excellent option for borrowers who don’t have a good crest history.
You can also be eligible for a lower interest rate with a crypto-backed loan opposite the conventional personal loan. Plus, you don’t have to sell your digital currency to take a crypto-backed loan, so if you think that your asset will increase in value in the future, it may be good for you to receive your collateral back.
Therefore, crypto-backed loans will give you the chance to borrow money against your available balance without entirely shutting yourself off to high market returns.
Unlike conventional lenders, Crypto lending distributes funds almost instantly, which need several days to give you your money. The loan amount will depend on your asset value, and many exchanges will even allow you to borrow up to 50% of that required value.
Drawbacks Of Crypto Lending
Since the value of cryptocurrency is more volatile than other assets, you might find yourself in a condition where the value of your crypto current goes down, and your lender requires you to increase your collateral to keep the loan active. It is also called- a margin call.
For example- if you took a $1000 loan and pledged $2000 in digital currency assets, then your loan-to-value ratio will be 50%.
However, if the value of your digital currency decreases by $1000, your lender will ask you to pledge another $1000 in digital assets or to pay off your loan immediately.
Crypto lending is not federally insured, so you will not be guaranteed compensation during events like security breaches.