Blockchain technology is undoubtedly the most inspiring innovation of this era. Everyone has recognized its value and wants to put their money on it. Blockchain technology, as we know, backs cryptocurrencies like Bitcoin, Ethereum, RippleCoin, and LiteCoin. Digital currencies serve as an alternative to conventional money, like USD, Euro, etc.
There’s one sector that’s benefiting from blockchain technology and that’s the lending part of the finance sector. Now, as the literal meaning says, crypto lending is a blend between cryptocurrencies and lending. Or, in other words, it’s the practice of lending cryptocurrencies or digital assets through various lending websites and crypto exchanges with an interest rate.
In the last few years, the lending of cryptocurrencies has become extremely popular amongst people associated with the crypto community. It has taken both the banking sector and institutional investors, whose main motto is to back new technologies and businesses and profit heavily, by storm.
Working of Crypto Lending
Cryptocurrency lending works just like how cryptocurrencies work, using Peer-to-Peer technology. It connects lenders and borrowers through the Internet. But crypto is lent instead of money on these platforms.
It works exactly like the regular lending of conventional money does. First, the lender will transfer the borrower the required amount of crypto assets to the borrower’s account. The borrower then sends back the crypto asset to the lender’s wallet, the amount to be repaid with interest. The loans are backed by some standard, be it cryptocurrencies, or physical assets such as real estate.
Even though the lending-borrowing procedure may differ from platform to platform, the essence of the concept remains the same. There’s a certain interest rate at which the lender offers credits and while repaying, the borrower has to pay the interest initially before paying the principal amount.
Now, there are two primary reasons for lending- first, for margin lending, and second, for personal usage. Margin lending is the process wherein a borrower requests the lender for a loan to purchase a crypto asset which he believes will appreciate. The lender has to avail of some funds for these purposes. The borrower has to return the amount with interest within the stipulated time.
For crypto-to-crypto lending, individuals lend digital assets such as Ether, Bitcoin, and altcoins, which they aren’t using for the time being. They lend it to concerned borrowers at an interest rate and earn huge profits on it.
Crypto Lending Apps and Platforms
Listed below are some of the most popular crypto ending platforms. You can use the features offered by each one of them and choose the most suitable platform for yourself.
You can use this platform to lend using assets like Bitcoin and Ethereum as collaterals. The word SALT stands for Secured Automated Lending Platform.
Some of the features of this lending platform are-
- Annual Return on Investment (ROI): Up to 10.3%
- Crypto lending investments
- Time period of loans- 7 days to 3 years
- Minimum investment: $250
- Supported Cryptos: BCH, BTC, LTC, XMR, ETH
- Stable coins: USDC, TUSD, DAI, PAX, and USDT
- Crypto Lending Platform from Estonia
Another popular lending platform powered by the European FinTech company, Credissimo, Nexo helps you lend and borrow quickly. It approves loans faster than any other lending platform.
How to Start Investing in Crypto Lending
Step 1: Select the Appropriate Platform
When you’re investing in crypto lending, the most important step is finding the best and the most suitable lending platform. There are two types of platforms, centralized and decentralized. Each platform has its pros and cons and you’ve to weigh them to select the best one for yourself.
For centralized platforms, the lender and borrower have complete autonomy while discussing the terms of the credit, but the actual transfer is approved and completed by the platform. The interest rate ranges between 1% to 5%.
In contrast, decentralized platforms don’t allow the involvement of third parties.
Step 2: Start Investing
Now, as an investor, the most significant aspect to look for is the collateral provided against the credit. The collateral must be in the form of cryptocurrencies like Bitcoin and Ethereum and should be more valuable than the loan.
We know that cryptocurrencies are volatile and the prices fluctuate. The lender can suffer losses if the prices drop. So, be mindful and analyze the market conditions properly before investing.
How Safe is Investing in Crypto Lending?
Investors who have ventured into Bitcoins and other cryptocurrencies have a good stock of cryptos lying lazily in their hardware wallets. It is a practice to hold your cryptos, be it Bitcoins or any other cryptocurrency as you can get a healthy return when you hold them. It is of utmost importance to a Bitcoin holder to safely store these assets and away from unscrupulous hackers. But, at times when the market is bearish and the crypto prices go down, you must be feeling disappointed and regretting the decision to hold these cryptos. Many times, you may feel bad for your funds being blocked and remain unused. And even if you need some money to invest in a property or buy some jewelry, it won’t be judicious to sell a part of your Bitcoins in a bearish market.
You can pitch on crypto lending in such situations and offer your cryptocurrency as collateral and secure a fiat loan. This way you can get the advantage of a much lower interest rate compared to a bank loan. Your credit card account is charged with an interest of 20% to 25%, whereas a company like Celsius Network charges only 9% interest on the loans they disburse against cryptocurrencies. Also, the crypto lending companies don’t give any importance to low credit history or poor purchase records while approving the fiat loans. They only consider the number of cryptos submitted as collaterals against the loan.
Prominent Bitcoin investor, Brock Pierce took a fiat loan to buy a house in Amsterdam for $1.2 million. He believes that his cryptos will give a better return over the years, so he preferred to take a fiat loan from the Swiss crypto lending website, Nexo, to acquire the luxurious property. He encourages other cryptocurrency holders to use their stash of cryptos placed idly in their digital wallets and get a fiat loan at a low rate of interest. This is like enjoying the best of both worlds.
How Crypto Lending can be Risky
Crypto lending has its own risks and you should never take the option all in innocence. There are some default risks or security risks associated with these types of loans. This is because the companies who keep cryptos as collateral to provide loans take into account the fact that people applying for such loans often have bad credit records and are viewed as high-risk defaulters.
Before sanctioning loans, the companies will consider the number of Bitcoins or Ethereum, or other cryptocurrencies put up as collaterals. In the fine print of the contract papers, the companies put a condition that says that the lender will keep around 80% of the cryptos collaterals in case of default in pay off.
The profile of the borrowers who avail of these attractive crypto lending schemes are investors who believe that the future of cryptocurrencies is bullish. These people know that they will get the highest returns from keeping the cryptos as collaterals and taking fiat loans at a low interest rate. On the other hand, the lenders also understand that in the volatile market, the repayments may take some more time.
If you are a crypto owner and putting up your cryptocurrencies for a loan, you must understand the security risks. You have to take out the crypto assets from the secure hardware wallet and trust the lending platform as the custodian. So, it will be prudent to get the details about the lending company and their custodians before keeping your valuable cryptos with them. For example, for Celsius Network, BitGo is the custodian and BlockFi uses the services of Gemini. Both BitGo and Gemini are trustworthy custodians but there is a need for an insurance policy in the event of your cryptos getting hacked. You may consider linking an insurance policy that will compensate your loss in case of fraudulent loss of your cherished cryptos.
Crypto Lending Can Prove to be Profitable
There are various benefits of investing in crypto lending. You can lend your crypto, get a cash loan by offering your crypto-assets as collateral, and also convert them to fiat currencies. Lending platforms ask for crypto holdings as collaterals from borrowers before approving the loan, so it’s confirmed that your money is secure.
Most platforms, for assurance, carry out KYC and AML verifications on the borrowers. This again ensures that credit frauds are avoided and prevent the entry of criminals in the entire process.
Interest rates for loans range widely but the benefit for the borrower is that they can retain the entire value of the collateral, gains, and losses included.
For the lender, they have the collaterals as security deposits. So if there’s a case of default or fraud, they can compensate using the borrower’s crypto asset in their possession. The assets will belong to the lender and they can sell it when its price increases.