Here is a helpful guide to understanding more about paper trading that helps investors get to know how the market operates and how...
In this guide, we will delve into the details of how crypto loans work, the different existing models (CeFi and DeFi), the requirements for applying, ways to use the obtained capital, and the advantages and disadvantages to consider before taking on debt.
Loans using cryptocurrencies as collateral have experienced a surge in popularity within the crypto ecosystem in recent years. This financial instrument allows cryptocurrency holders to access liquidity without the need to sell their digital assets.
In this guide, we will delve into the details of how crypto loans work, the different existing models (CeFi and DeFi), the requirements for applying, ways to use the obtained capital, and the advantages and disadvantages to consider before taking on debt. Furthermore, we will explore practical examples of their application, including debt consolidation, vehicle purchases, holiday expenses, or their use for investment and trading purposes.
A crypto loan, as the name suggests, is a personal loan secured by cryptocurrencies. In other words, the borrower provides a specific amount of cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), and Tether (USDT), among others, as collateral. In exchange for this collateral, the borrower receives a sum of cash, usually in the local currency, to be repaid in periodic installments over a predetermined period, ranging from 12 to 60 months depending on the lender.
The operation is similar to any other secured loan, such as a mortgage for a home or a loan for a car. The key difference here is that the collateral is not a physical asset but a cryptocurrency.
By securing the loan with cryptocurrencies, the lender can seize the collateral if the borrower fails to make the agreed-upon payments. Conversely, if the borrower fulfills all payments on time, they regain complete control and ownership of the initially pledged cryptocurrencies.
Therefore, these loans function similarly to traditional market loans but with a significantly lower interest rate.
To request a crypto-backed loan, you need to have a cryptocurrency to use as collateral. Once you possess the cryptocurrencies, the next step is to find an entity or online platform that provides these types of loans. Each financial institution or platform has its conditions, so it’s crucial to thoroughly research various options before making a decision.
When choosing a lender, create an account on their platform and link your crypto wallet to it. This allows the lender to verify your cryptocurrency balance available to secure the loan. It’s worth noting that on most centralized platforms, you’ll need to complete the identity verification (Know-Your-Customer) process, which usually requires personal and address documentation.
After completing these steps, you can request a specific loan amount, taking into account the value of the cryptocurrencies offered as collateral. Each entity sets its own criteria but typically lends between 20% and 70% of the presented crypto collateral’s value.
Finally, sign the loan agreement, and upon approval, receive the requested funds. This usually happens immediately or within a couple of hours. From the moment the money is received, you start making the agreed-upon periodic payments.
Imagine you are considering borrowing 100 USDT through the Binance cryptocurrency exchange. To do this, you would need to provide 142 USDC as collateral. This means the interest associated with the loan would be 70%. It’s akin to putting down 142 dollars as a deposit to borrow 100 dollars. This is a basic example using USDT, but you can do it with almost any cryptocurrency on the platform.
There are primarily two types of loans that can be obtained using cryptocurrencies as collateral:
Cryptocurrency-backed loans have become highly versatile, allowing financing for a wide variety of personal or business needs. Here are some specific examples:
Obtaining money through a cryptocurrency-backed loan has several advantages compared to other types of financing. However, it also carries certain risks worth considering.
Among the key advantages of crypto loans are the following:
The drawbacks of crypto loans to consider include the following:
In summary, seeking a loan using cryptocurrencies as collateral is an attractive option for those looking for liquidity but unwilling or unable to sell their current holdings.
However, it’s essential to fully understand the potential risks of taking out a crypto loan before proceeding. While the interest rates are low and the process is expedited, there is a real possibility of losing all pledged holdings through margin calls or even partial liquidations of assets.
Therefore, before applying for a crypto loan, thoroughly research the terms and conditions of each platform. Compare them to find the lowest interest rate, and always have a backup plan in case the value of your collateral cryptocurrencies suddenly drops. Remember that the crypto market is known for its extreme volatility.
A crypto loan is a type of personal loan secured by cryptocurrencies like Bitcoin, Ethereum, Tether, etc. The borrower puts up the crypto as collateral in order to receive a loan in cash which is repaid in installments over a set period of time.
To get a crypto loan you need to have cryptocurrency, find a lending platform, link your crypto wallet, get approved based on your collateral, sign an agreement, and receive the funds. Once you finish repaying the entire loan, you will receive your cryptocurrencies back.
The steps are the following: have eligible crypto, find a lending platform, create an account and link wallet, request a loan amount based on collateral value, sign an agreement or contract, and receive loan disbursement.
The two main types are centralized crypto loans (CeFi) offered by centralized companies and decentralized loans (DeFi) governed by smart contracts on the blockchain.
Crypto loans allow you to access liquidity for needs like consolidating debt, vehicle purchases, vacations, or investing without selling your crypto holdings.
Key advantages of crypto loans include low interest rates, fast approval times, flexible use of money obtained, and avoiding capital gains taxes.
Yes, cryptocurrency lending is generally legal, though regulations vary across different countries and jurisdictions.