Latest news about Bitcoin and all cryptocurrencies. Your daily crypto news habit.
Cryptocurrency has taken the world by storm, with DeFi services like crypto lending allowing users to make good returns on their crypto assets. Here is all you need to know about cryptocurrency and crypto lending.
Facts About Cryptocurrency Lending
Cryptocurrency or digital money was introduced to offer an alternative to spending. Besides, it was designed to eliminate the entry barrier and allow the underbanked and unbanked access to financial services unreachable in the traditional monetary system. Over the years, demand for more crypto services like lending and borrowing rose, given that this service was already existent in traditional banks. Exchanges and crypto platforms would later introduce this service into the space to the users' excitement.
Crypto lending benefits lenders and borrowers. For lenders, it offers a good return on their crypto assets. Instead of allowing digital assets to stay idle in their wallets, users can lend their holdings for small profits. Borrowers can have access to more funds without selling their holdings. There are tons of sites to lend your bitcoin and other cryptocurrencies, but finding the safest crypto lending platform can be difficult. The crypto space is riddled with scams, so one needs to be careful when signing up on crypto lending platforms.
With that being said, let’s dive further into some interesting facts about crypto lending and how it compares to obtaining a loan from traditional banks.
1. Crypto Lending Platforms Come in Two Types
Before you sign up for any crypto lending service, you must know that two types of crypto lending platforms exist – CeFi and DeFi lending.
Centralized Finance or CeFi lending platforms share some similarities with bank lending. They set the loan terms and interest and require KYC completion for users. CeFi lending platforms are custodial, meaning that they manage your funds and have access to your private keys. This limits users' privacy, which most lenders don't like. Typically, loans on centralized platforms attract low interest, but stability is guaranteed. CeFi platforms are more user-friendly. They can lend stablecoins, fiat, and cryptocurrency.
Decentralized Finance or DeFi lending platforms are managed by smart contracts instead of a central authority like their CeFi counterparts. In DeFi loans, the lender sets the loan terms and interest rates, and it is up to the borrower to accept them or not. Since the platforms are managed by smart contracts, users maintain a high level of privacy and control of their crypto holdings. However, if payment is missed, the lender has the right to take action against the borrower. DeFi loans offer higher interests than CeFi loans and can lend in cryptocurrency and stablecoins. They don’t lend fiat currency. DeFi lending platforms don't require KYC verification, so you can maintain 100% anonymity.
DeFi lending platforms require a bit of technicality and experience to navigate since the user controls everything. As mentioned, CeFi is more user-friendly and will suit beginners more. Check out the best crypto loan platforms in 2022.
2. Crypto Lending Only Requires Collateral
Ask anybody who has applied for a bank loan, and they will tell you the number of paperwork involved in the process, including credit checks. This isn't the case in crypto lending. Both DeFi and CeFi loan users don't require credit checks, although users of centralized crypto lending platforms need to undergo a KYC verification process as mentioned already.
The only thing that is required to obtain a crypto loan is collateral. Many crypto lending platforms utilize the over-collateralization model where the borrower provides a crypto-asset whose value exceeds the loan amount. This model covers any potential loss in case of a payment default. Once the borrower provides the collateral, they will have instant access to the loan amount.
3. Crypto Lending Platforms Use LTV to Determine Collateral
LTV or Loan-to-Value ratio is used by crypto lending platforms to determine how much collateral a borrower ought to provide to access a loan. LTV also determines the crypto they will present, and the length of the loan term. It is the amount of the loan divided by the borrower's collateral. For example, if a loan of $500 requires collateral of $1000, the LTV is 50%.
As mentioned, crypto loans are typically over-collateralized to manage lending risks. Most lending platforms offer between 20% - 90% LTV. The lower the LTV, the lower the interest charged.
4. Not All Cryptocurrencies Can Be Used as Collateral
Despite having more than 10,000 active cryptocurrencies, not all are acceptable on lending platforms. They only accept the top 20 cryptos by market capitalization. This includes bitcoin, Ether, Litecoin, and stablecoins like USDT and USDC. Some crypto lending platforms accept up to 50 cryptocurrencies and stablecoins.
5. Crypto Lending is Risky
Crypto lending comes with its risks. Crypto is volatile, and users may witness a drop in the value of their collateral and LTV in bearish market conditions. When this happens, borrowers may expect to pay higher than agreed, and lenders may incur losses.
Besides, the crypto industry is poorly regulated. The level of regulation depends on the country. For example, crypto regulation in the United States may differ from regulations in Singapore or China. We have witnessed how platforms like Celsius liquidated their Bitcoin loan due to the bearish market. The recent collapse of FTX is another indicator of how risky and volatile crypto is.
Crypto lending is a solid moneymaking avenue, but it is not without risks. Plus, the profitability depends on the crypto lending platform. You must research the platform that offers the best interest without compromising security and privacy before you sign up.
How does cryptocurrency lending work?
Cryptocurrency lending works by lending out your deposit to borrowers in exchange for interest payments. The interest could be added to your crypto account on a daily or weekly basis.
Can you make money from crypto lending?
Crypto lending is one of the exciting ways to earn passively in the crypto world. You can make money by lending your assets to borrowers.
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.