By
Temitope Olatunji
April 18th, 2024
The unique nature of crypto loans means that they carry a number of advantages over traditional forms of lending for both the lender and the borrower.
After a period that saw Bitcoin reach an all-time high of almost $64,000, interest in the cryptocurrency sector is continuing to intensify. That’s true not just with regard to use of the new form of currency as a payment and investment tool, but also as a device for lending and borrowing money, as well.
In fact, Reuters reported that last year, the value of crypto loans shot up sevenfold in the five months between March and September, reaching a market value of $3.7 billion by the end of that period. But exactly are these arrangements, how do they work and who benefits from them?
New Way of Lending
Crypto loans are a new type of financial lending that concern themselves with using cryptocurrency as collateral for a standard loan. This means that an investor in Ethereum, for example, might be short of immediate cash, or perhaps wishes to have more capital to trade with, but is loath to liquidate his Ethereum capital because he believes its market value will soar in the future.
Instead, he can use Ethereum as collateral and receive the currency of his choice right away from either a private lender or a personal fixed income fund. Due to the volatile nature of Ethereum (and all other cryptocurrencies), he will likely have to stake a significantly higher value of the cryptocurrency than the currency he receives in exchange – but as long as he pays back the loan (plus interest), his Ethereum stake will be returned to him.
If, however, the borrower finds he cannot pay back the loan – or if the value of his Ethereum collateral plummets – his assets will be liquidated to ensure the lender is not out of pocket. If Ethereum nosedives so much that his collateral cannot cover the original loan, the platform providing the service will step in to safeguard the lender.
Who Benefits? Everyone
The unique nature of crypto loans means that they carry a number of advantages over traditional forms of lending for both the lender and the borrower. For the former, they can earn attract interest rates on their capital that they simply wouldn’t be able to access elsewhere. While the exact rates available will vary from platform to platform and from transaction to transaction, it’s possible to earn up to 15% interest in this manner.
Of course, that kind of passive income is a huge draw for the lender, but what’s in it for the borrower? Well, the fixed term, fixed interest nature of the loans means that he always knows what he is due to pay, while those elements combine to ensure he can achieve a lower collateral ratio than he might experience elsewhere.
What’s more, the sophisticated nature of Blockchain technology means that all transactions are backed by smart contracts, guaranteeing their security, and can take place instantaneously. This is highly convenient for a borrower who needs cash post-haste – but can also help them to improve their payment score if they keep up their end of the bargain.
As such, crypto loans are an innovative and interesting new way to organize your finances, accessing the capital you need with the collateral you have – and there are no hidden fees or logistical complications. It’s the lending of the future.