intermediate
Lending and borrowing money is one of the oldest and most reliable ways of amassing wealth. Whether you need some extra cash to invest in a business venture, or want to earn some interest on your savings, loans have always been the go-to for many investors when it comes to maximizing their long-term profits.
When you want to borrow or lend a fiat currency, you either go to a bank or a business that offers loans or ask somebody you trust and know well for help. In all of these cases, there needs to be a layer of trust between the two parties, signified either by having a close personal relationship or signing a contract. This can be inconvenient for many people.
Cryptocurrency and the blockchain technology have already revolutionized dozens of industries — and, naturally, the banking industry is no exception. Crypto loans have been around for a few years now, but many people and crypto users still don’t know much about them and aren’t aware of the benefits they can provide.
In this article, we will talk about the ways to lend or borrow your digital currency, and how crypto lending works.
What Is Lending in Crypto
Cryptocurrency lending is nothing more (or less) than traditional lending done in crypto. If you’re in for a long haul, you can lend your digital assets and earn interest on them, making profit in the long term without having to get a bank account.
There are quite a few platforms out there that offer this feature. Putting your digital currency into an equivalent of a savings account (a crypto interest account) and/or loaning it out yields a much higher return than traditional loans — on average, it can be up to 10 times higher than the annual return provided by traditional savings accounts.
Additionally, when you lend crypto, your digital assets don’t get locked up for a long period of time — this gives you extra flexibility.
Alternatively, you can also use your crypto to borrow assets.
How Do Bitcoin Lending Platforms Work?
Crypto-backed loans use a crypto coin or token as collateral for borrowing either USD or another digital asset. Keep in mind that your collateral will be locked in until you pay your loan out in full.
Usually, you will be able to choose the asset you want to receive your loan funds in — most platforms offer USD and a few select cryptocurrencies (in most cases, stablecoins).
Benefits of Cryptocurrency Loans
It’s hard to say whether crypto lending is better or worse than traditional lending, but it’s also equally hard to deny that it offers some unique benefits.
Low Interest Rates
Crypto loan interest rates are generally lower than those of traditional banks as their high collateral requirements make them a lot more secure for the lender. However, they are still higher than the rates offered by most mortgages or car loan programs, so we would advise against using crypto loans for big purchases.
No Credit History Check
One huge benefit of crypto loans is the lack of a credit check. You don’t need to painstakingly build up a credit score for your whole life to take out a crypto loan, and you don’t need to worry about not receiving one because you didn’t pay your credit card debt once due to some unforeseen circumstances.
Having no credit check makes crypto loans a lot more democratic than traditional ones.
Funding Is Fast
Most crypto loans are funded on the same business day that you make a request. As a result, cryptocurrency loans are a great option if you need money fast.
DeFi
Decentralized finance (DeFi) has opened up opportunities for people to take advantage of fully trustless loans without any middlemen involvement. DeFi lending platforms use code instead of people to manage loans — smart contracts make it easy to automate loan payouts.
Crypto loans, made on a decentralized crypto lending platform, are fully transparent; there’s no verification process like KYC (which can be both an upside and a downside), but, on the other hand, interest rates are usually a lot less beneficial than those on centralized platforms.
Things that Should Be Taken into Account Before Engaging in Cryptocurrency Lending
There are a few things that you should know before taking out a crypto loan or lending out your own digital assets.
Borrowing Limits
Most cryptocurrency lending platforms have borrowing limits in place. Usually, the limit (or as it is also called a loan-to-value (LTV) ratio) is 50%, but some services allow you to borrow digital assets worth up to 90% of the value of your collateral.
An LTV ratio of 50% means that you will have to deposit 2 times the amount you’re borrowing as collateral. For example, if you want to borrow 10,000 USD when BTC is worth $10,000, you will have to deposit 2 BTC as collateral.
While this can be rather inconvenient for borrowers, high borrowing limits act as a sort of insurance for lenders, preventing them from losing too much should the crypto they lent out plummet.
Volatility
The word “volatility” is bound to accompany any crypto-related conversation. Crypto assets can crash at any given moment, ruining all your savings, or putting you in debt. If you borrow assets against crypto collateral and its price suddenly drops, you will most likely receive a margin call and will have to increase your collateral. This is especially dangerous for borrowers who choose a platform that requires them to always maintain their loan-to-value ratio. Because of this, crypto loans are a lot more risky than traditional ones.
No Insurance
Unlike banks and other traditional financial institutions, crypto platforms typically don’t offer any official insurance for people who deposit their digital assets using their service. As a result, crypto loans and savings accounts are less secure, and you need to be really careful when choosing which lending platform you can trust with your funds.
If you want your loan to be extra safe, we recommend looking for a platform that offers at least some form of insurance.
How to Get a Bitcoin Loan
First, you will need to choose whether you want to get a loan on a centralized or a decentralized platform.
Decentralized Platforms
Getting a crypto loan on DeFi services is extremely quick and easy. Just head over to your reliable service of choice, like Aave or Compound, or Venus, apply for a loan, send them the crypto you’re going to use as collateral, and wait for the funds to arrive.
Example – Venus.io
Let’s take a look at how you can get a crypto-backed loan using the DeFi platform called Venus.io. It is a fully decentralized lending service built in the BNB Chain. Venus allows investors to use digital currencies as collateral for borrowing up to 75% of the total value of their assets. It also lets users mint its stablecoin VAI.
Venus is a great place to start your decentralized crypto lending journey — it offers lightning-fast transactions (about 3 seconds on average) and low fees. Plus, it gives amazing rates for both borrowers and lenders and has a wide variety of crypto assets available for personal loans. Among the listed coins and tokens, one can find BNB, XRP, LTC, and many more, including their own stablecoin,VAI.
Venus does not require a credit check for borrowing any crypto asset available on its platform. As a result, the borrowing process is incredibly quick and easy. Beginner-friendly to the very core, this crypto platform is a great choice for making your first steps in the DeFi world.
To lend crypto on Venus, simply go to the dashboard, connect your preferred crypto wallet, and click on the asset you want to lock up. Then, simply confirm the transaction in your wallet, and keep an eye on your loan.
To borrow funds on Venus, you will first need to deposit some funds on the platform to use those assets as collateral. Click on your chosen coin or token in the “Supply Market” section, deposit the required amount on the platform, and click on the “Collateral” slider on the right side of this section. Afterward, go to the “Borrow Market” and click on the asset you would like to borrow. The borrow APY is the interest you will have to pay for your loan.
Easy, right? Much less hassle than getting a loan from a bank — and it comes with the bonus of being fully decentralized, too!
Important note: since Venus operates on the BNB Chain, don’t forget to have some BNB in your crypto wallet to pay fees.
Centralized Platforms
Getting a crypto loan on a centralized platform can take a bit longer, but it is ultimately just as easy.
First, you will have to create an account and verify it by passing KYC — a procedure required for keeping the crypto space safe and secure from money laundering and other criminal activities. Then, you just apply for a loan, choose which asset you want to get, choose your collateral, send it to your platform of choice, and follow any further instructions they give you.
FAQ
Is crypto lending profitable?
Lending out your crypto assets can be extremely profitable if done in the right way. Research shows that it can be 10 times as profitable as opening a traditional savings account.
Crypto loans are perfect for crypto enthusiasts: they allow you to hodl your favorite digital assets while simultaneously earning interest on them.
How do crypto credit cards work?
Cryptocurrency credit cards work in a similar way to fiat credit cards. Those cards make it extra easy to pay for your everyday expenses using crypto.
What is the best crypto lending platform?
There’s no one best crypto lending platform. When choosing a crypto lending program and platform to go for, check how seriously they take their security, what other users have thought about them, which loan options they offer, their repayment terms, what their fees/rates are, and so on.
Some good centralized crypto loan platforms are Nexo, BlockFi, and Celsius Network.
There are also many good decentralized crypto lending platforms, including but not limited to Aave, Compound, and Oasis Borrow.
See our overview of the best crypto lending platforms here.
Can I borrow crypto?
Yes, you can borrow crypto assets. Although most platforms will only let you borrow stablecoins.
Can you borrow in Bitcoin?
Not all digital currencies are available for borrowing and lending, but Bitcoin, as the most popular and the biggest cryptocurrency, is supported by most crypto lending platforms.
Is crypto lending safe?
Crypto lending is as safe as any other crypto transaction.
There are certain risks that are associated with loans in general and ones that are unique for crypto loans in particular. The platform that you use could always turn out to be a scam, or it can be hacked — these two threats are almost always hanging over users’ heads. To minimize the chances of you being scammed or of your funds being stolen, use reliable crypto loan services, check whether you’re using the platform’s genuine website, etc.
As for the risks that are unique to crypto loans, well, they’re a bit harder to avoid. Perhaps the biggest one is that unlike traditional financial services, crypto companies are not required by law to maintain a certain level of liquidity. Considering how volatile the crypto market is, this poses a great risk to people that deposit their money to those platforms. This is why we recommend looking for platforms that offer insurance. Margin calls are another risk that is rather unique to the crypto world, as traditional collateral is much less likely to plummet than crypto.
Disclaimer: Please note that the contents of this article are not financial or investing advice. The information provided in this article is the author’s opinion only and should not be considered as offering trading or investing recommendations. We do not make any warranties about the completeness, reliability and accuracy of this information. The cryptocurrency market suffers from high volatility and occasional arbitrary movements. Any investor, trader, or regular crypto users should research multiple viewpoints and be familiar with all local regulations before committing to an investment.