Many people invest in Bitcoin and other cryptocurrencies under the belief they can serve as a store of value.
A cryptocurrency loan is becoming a popular tool for those interested in leveraging investments through what’s seen as a more traditional financial product.
They essentially work the same as a traditional collateralized loan. Borrowers leverage cryptocurrency to secure a loan of fiat currency (or a stablecoin) from a lender who offers a loan term with an interest rate. Prospective borrowers can also borrow cryptocurrency assets in exchange for fiat or stablecoin collateral.
Why has cryptocurrency lending become so popular? Largely due to the rise of decentralized finance (DeFi), which continues to open up the door for open and permissionless lending opportunities.
Why Would Someone Want To Take A Cryptocurrency Loan?
Cryptocurrency loans are a smart way for those who want to make their money work for them without having to sell holdings, since many buy digital currencies like Bitcoin and Ethereum with hopes they will increase in value.
A loan lets people access USD to pay bills, fund different projects, to diversify investments, or to purchase assets like real estate while still keeping control over cryptocurrency holdings.
There’s also a few potential tax advantages for cryptocurrency loans. For example, there’s no capital gains taxes involved with a crypto loan.
Some might even be able to deduct interest from a cryptocurrency loan on their ‘traditional’ tax bill, but this will depend on the person’s specific financial situation. Some questions about cryptocurrency loans and taxes remain since some jurisdictions do not have any specific financial guidance on assets like cryptocurrency.
What are some of the differences between a traditional peer-to-peer loan and a cryptocurrency backed loan? Traditional loan terms vary greatly based on a borrower’s credit and general financial history. Crypto-backed loans don’t pay much attention to credit history.
There’s also an inherently greater risk with crypto loans right now due to the lack of regulation in the industry, and the high number of people defaulting on loans, since crypto lenders and borrowers might be in different countries.
The Range Of Crypto Lending Services
Today’s virtual currency holders have a variety of crypto lending formats to take advantage of. A few of the more popular ones include
Margin Lending: Margin lending is offered by platforms like Nuo. It allows lenders to fund borrowers with multiple currencies. People who properly take advantage of trade volume and the price of an asset can use margin lending to cultivate a passive income. However, it’s currently difficult for any borrowed funds to leave the lending platform since most margin loans are self-contained.
Crypto Lending: The simplest form of digital currency lending, where people just agree to a smart contract to loan out cryptocurrency holdings for an agreed-upon interest rate. Coinbase is a well-known firm that offers crypto-to-crypto lending.
Crypto-To-Fiat: People who need cash can take their cryptocurrency to a platform like SALT Lending to secure a cash loan, using their virtual currency as collateral. Some platforms place specific stipulations on crypto-to-fiat loans to account for massive drops in collateral prices.
Flash Loans: Flash loans, an element of decentralized finance, let users borrow up to the full free liquidity amount on a lending protocol, then pay back the loan at the end of the transaction after using the money for other transactions. However, no transaction will execute if a borrower can’t pay back the full amount of the loan. Flash loans are often used for arbitrage opportunities or to shift collateral on specific platforms.
Throwing Cold Water On Crypto Lending? Opinions Differ.
Cryptocurrency lending offers a different way for people who were formerly just relegated to either trading or holding their assets, especially since a variety of platforms offer particularly strong interest rates for stablecoin lending.
Projections are the amount borrowed across the cryptocurrency lending industry could surpass $25 billion by 2022. Information from CredMark says the cryptocurrency credit market
issued more than $6.4 billion in loan originations, as of September 2019.
Some analysts worry about the rise of a crypto lending credit bubble if people with bad credit take advantage of virtual currency lending opportunities. There are fears that a burst may occur if cryptocurrency prices were to suddenly dip.
Graychain’s first report on the collateralized cryptocurrency lending industry also depicted some seemingly sobering statistics. The company noted just $86 million had been earned back in interest out of an estimated $4.7 billion in loans.
However, Graychain noted in the report that people are “making more small loans, rather than borrowing millions at a time.” Short-term loans would not give any time for an investor to accrue interest. This would not be an issue if a borrower was using a loan to just engage in speculative activity.
The Immense Opportunities For Crypto Lending
There’s a wide range of platforms that give borrowers and lenders multiple ways to engage in the lending industry.
Many let crypto owners clearly spell out the terms they are looking for when it comes to borrowing money, giving lenders a chance to review terms and make decisions about who to lend money to.
But many companies in the crypto lending world are taking innovative strides to offer more features to lenders and borrowers. Cred has introduced elements like supply chain lending and flexibility with interest payments to the industry and teamed up with the Litecoin Foundation to offer up to a 10% return to lenders.
SALT Lending has tailored lending services to borrowers – offering a range of interest rates for different cryptocurrency assets.
There’s still a few risks associated with cryptocurrency lending. This includes the potential for smart contract hacks or low liquidity among decentralized finance loans that could dramatically shift rates.
The Future Of Crypto Borrowing And Lending
Hopes are the liquidity and ease of sale with cryptocurrency can continue to drive the wider cryptocurrency lending market, especially as decentralized finance platforms continue to develop.
Borrowing and lending give virtual currency holders opportunities to leverage their investments without having to sell assets and miss out on a potential rise in value in the future.