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Crypto lending has gained immense popularity in the last couple of years. Crypto lending is now a part of the mainstream conversation among banking experts and investors. It is estimated that crypto loans will surpass $25 billion by 2022.
As reported by NorlƄn, crypto lending is a new industry that has experienced rapid growth sparking fears of a credit bubble. Crypto lending works like peer-to-peer lending, thanks to the concept of tokenization. Crypto lenders believe that every asset can be converted into digital value such that investors can use different crypto assets as security for loans.
The crypto lending market flourished in 2019. A report published by Gray Chain in December 2019 showed that crypto lending was responsible for more than $6.4 billion in loans for the first three quarters of 2019. Crypto lending sporadic growth raises concerns from skeptics. According to the skeptics, the growth could be the beginning of a credit bubble.
Crypto lending growth has disrupted the credit market in two ways:
Diversity of crypto lenders
A majority of crypto lenders focus on peer-to-peer lending, whereby investors can borrow loans and use their crypto assets as collateral. The investors often borrow from other cryptocurrency investors. Crypto lenders often allow the owners of cryptocurrency to come up with the terms of borrowing. If the borrowers meet the terms, they can access the crypto loan through digital platforms or their credit cards.
Crypto lending has disrupted the credit market as it is evolving faster. Cred, a notable crypto platform, came up with revolutionary services such as supply chain lending and interest payment flexibility.
Other key players in the crypto lending industry, such as SALT Lending (SALT-USD), Celcius, Genesis, and BlockFi, have established a niche in the market. SALTās primary focus is on borrowers, while BlockFi serves both lenders and borrowers.
The platforms have different interest rates for different crypto assets. Stablecoins lenders earn the highest returns. The diversity and flexible terms in crypto lending have disrupted the credit industry with borrowers that used to rely on banks and financial institutions opting to borrow from crypto lenders.
Average interest earnings are improving
A 2019 report by CredMark determined that crypto lenders earn an average of 6% in interest. The report noted that 6% of earnings was a significant improvement from 4% interest earnings reported three months earlier.
6% in interest earnings is lower in comparison to the average returns from low-risk mutual funds. Investors shy away from crypto lending because of low-interest earnings, and yet borrowers continue to take crypto loans for the same purpose. Crypto lending will continue to experience tremendous growth, and it has become an alternative to traditional banks as it supports almost all the services that banks offer.
As crypto lending gains traction, investors in the crypto industry should be wary of the challenges that come with crypto lending. Some of these challenges are not experienced in the traditional credit industry as it is not entirely reliant on technology.
Some of the risks of crypto lending are:
- Platform safety: borrowers and lenders connect on a lending platform. Are these platforms secure? What happens in case of a breach or if it hacked. Investors have to educate themselves about the safe crypto platforms before engaging in crypto lending and borrowing.
- Default rate: when compared to traditional creditors, crypto lending comes with the risk of higher defaulters.
- Volatility: The crypto lending market is more volatile than the traditional credit industry.
Crypto lending is on an upward trajectory in the credit market. Cryptocurrency investors can now access a variety of crypto loans without having to sell their assets. Crypto lending has become mainstream such that its impact is felt in the global financial system. Crypto lending will continue to change the credit market as it is a flexible alternative to traditional credit.
Disclaimer
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.