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The crypto world is evolving at a rapid pace. Many were understandably perplexed when Satoshi Nakamoto created the first blockchain because so little was known about it. However, more people are embracing cryptocurrency today, and they are using it in a variety of ways, from sending money to asset protection. We now have another very exciting product for those in the decentralized finance industry: crypto lending. So, what exactly is it, and how does it work?
Crypto lending
If you have some crypto coins, one recommended method is to store them in a secure wallet and wait for the price to rise. However, instead of selling the coins, you can use them as collateral for a loan. Your coins are returned when you repay the borrowed money plus interest.
A crypto loan requires you to pledge a portion of your cryptocurrency holdings as collateral for the money you borrow. You retain ownership of your cryptocurrencies while paying down the loan, just as you would with a secured loan such as a car loan or mortgage. However, if you do not repay the loan as agreed, you risk losing a significant portion of your collateral.
Most platforms allow you to borrow up to 50% of your digital asset balance, though some platforms allow you to borrow up to 90% of the value of your portfolio. However, there are some limitations to what you can do with the assets, and if you default on your debt or the price of your cryptocurrency falls significantly, you may default on the loan and lose the assets.
Depending on the platform, you may be able to receive your loan funds in US dollars or selected cryptocurrencies. The types of cryptocurrencies you can use to secure a loan, on the other hand, are limited and vary by platform. If you don’t have the right currency, you’ll have to exchange it for another.
Furthermore, some lenders allow you to secure a loan with non-custodial crypto, which are assets held in a digital wallet that is not linked to an exchange, but many require you to hold your digital assets with the platform to be eligible. While most crypto exchanges are secure, you may not want to keep your assets with a platform you believe will fail.
Benefits of crypto lending
There are numerous reasons why you should consider using your crypto holdings to secure a loan. Here are some of the most significant advantages:
- Low-interest rates: Crypto loans have lower interest rates than many unsecured personal loans and credit cards because an asset secures them. As a result, they may be appealing to someone who has digital assets that they do not intend to use or trade and wishes to save money.
- Ownership: If you require cash, a crypto loan allows you to obtain the funds you need without selling your holdings.
- Rapid Funding: If you are approved, you may be able to receive your loan funds within a few hours.
- No credit check: When you apply, the crypto lending platform may or may not perform a credit check in many cases. If your credit history is less than stellar, this could be a very appealing alternative to bad credit loans.
Is crypto lending safe?
There have been numerous disastrous hacks in the history of cryptocurrency. For this and other reasons, anyone handing over cryptocurrency assets as collateral should prioritize security.
Whether borrowing or lending, it is critical to investigate the lending platform’s custodian’s security and reputation in the financial markets. It may also be important to investigate whether there is an insurance policy to protect against the possibility of the platform being hacked.
Risks to borrowers
Because cryptocurrencies are volatile, the number of digital currency borrowers must put up as collateral may be many times the amount of actual cash they receive from the loan. This effectively multiplies the amount they risk losing if they default on the loan.
Defaults can be expensive: Many major crypto lending platforms allow lenders to keep up to 80% of collateral if the borrower defaults.
Borrowers should also be aware of the wild fluctuations in the value of the cryptocurrency used as collateral. If the collateral value falls, some lenders may make a “margin call,” in which they request more collateral to bring the total value back up to the original loan ratio. While a borrower will receive that cryptocurrency back when they repay the loan, it can be a highly disruptive financial event with financial penalties if the borrower does not have the cryptocurrency to meet the requirements.
Where to get a crypto loan?
Obtaining a Bitcoin loan or any other cryptocurrency loan is a rapidly evolving process. Numerous online platforms allow borrowers to take out loans against the cryptocurrency they own, and new competitors are constantly joining their ranks. There are a few centralized platforms that provide loans to cryptocurrency investors directly. However, most crypto loan platforms are decentralized financial (DeFi) platforms, which connect cryptocurrency-investing borrowers with cash lenders.
The interest rates charged by crypto lending platforms can vary greatly depending on a number of factors, including the cryptocurrency used as collateral. Rates may be significantly higher than the average mortgage rate and may even approach the double-digit interest rates charged by credit cards in some cases. Borrowers are usually required to pay a commission to the peer-to-peer platform, in addition to other fees.
While a borrower may be looking for the best available rate, there are other reasons to use a platform. For starters, the platform must be dependable, with solid financial backing, so that it’s still viable when it comes time to get your collateral back.
Conclusion
Cryptocurrency is a new and complex area of the capital markets that appears to offer incredible opportunities. Crypto loans provide a source of quick liquidity, allowing you to stay invested in these markets while freeing up capital for short-term needs.
However, both cryptocurrency loans and cryptocurrency investing have their own set of potential risks for investors. Cryptocurrency is a high-risk/high-reward investment that should be treated accordingly. Newer cryptocurrencies may carry greater risks and rewards than older ones. However, blockchain as a whole is gaining traction, with institutional-level custody services and futures markets joining up.
Frequently Asked Questions
How To Invest In Cryptocurrency Stocks?
Cryptocurrency can be purchased in two ways: through mining or exchanges. The process of confirming and adding transactions to the blockchain public ledger is known as cryptocurrency mining. Cryptocurrency exchanges are another option. Exchanges make money by charging transaction fees, but there are alternative platforms where you may communicate directly with other cryptocurrency traders.
Which Cryptocurrency Is Best To Invest In 2021?
Many altcoins are flourishing to invest in. Some cryptocurrencies with great potential are Ether, Ripple, Tron, and more. Investors are trying to diversify their portfolios and are flocking to the leading cryptocurrencies. Many growing businesses are already accepting cryptocurrency as acceptable payment methods.
What Is Virtual Currency?
Virtual currency is a type of uncontrolled digital currency that can only be used online. It is exclusively stored and transacted using designated software, mobile or computer applications, or unique digital wallets, and all transactions are conducted through secure, dedicated networks. Because digital currency is just currency issued by a bank in digital form, virtual currency is not the same as a digital currency. Virtual currency, unlike ordinary money, is based on a trust structure and cannot be issued by a central bank or other banking regulatory organization.
Is Mining Cryptocurrency Legal?
Cryptocurrency mining can be time-consuming, expensive, and sporadically profitable. Mining has an appeal for many cryptocurrency enthusiasts as miners are paid directly with crypto tokens for their efforts. The legality of cryptocurrency mining is dependent on where you live. In India, there is no restriction on crypto mining.
Is Cryptocurrency Banned In India?
No, cryptocurrency is not banned in India. India has seen its ups and downs in the crypto sector concerning its legal status. The Reserve Bank of India (RBI) issued a circular in April 2018 advising all organizations under its jurisdiction not to trade in virtual currencies or provide services to assist anyone in dealing with or settling them. A government committee proposed outlawing all private cryptocurrencies in mid-2019, with up to ten years in prison and severe penalties for anyone dealing in digital currency. The Supreme Court overruled the RBI's circular in March 2020, allowing banks to undertake cryptocurrency transactions from dealers and exchanges.
Are Cryptocurrencies Legal In India?
In India, cryptocurrency is legal, and anyone can buy, sell, and trade it. Because India lacks a regulatory system to regulate its operations, it is presently uncontrolled. According to the Ministry of Corporate Affairs, companies must now document their crypto trading/investments inside the financial year.
What Is Cryptocurrency?
A cryptocurrency is a digital currency secured by encryption, due to which chances of activities such as counterfeiting and double-spending taking place get close to impossible. Cryptocurrencies get created on blockchain technology ( a distributed ledger enforced by a distributed network of computers). Cryptocurrencies are unique in that they do not get issued by any central authority. The term "cryptocurrency" comes from the encryption techniques used to keep digital currencies and the network safe.
Is Crypto Legal In India?
Cryptocurrencies are legal in India, and anyone can purchase, sell, and exchange them. It is currently uncontrolled, as India lacks a regulatory structure to oversee its operations. Per the Ministry of Corporate Affairs, companies must now record their crypto trading/investments within the financial year. In cases where a person receiving the gains is an Indian tax resident, or the cryptocurrency is regarded as domiciled in India, cryptocurrency transactions have been taxable in India
Are Cryptocurrencies A Good Investment?
Cryptocurrency has the potential to make you extremely wealthy, and the potential to cause you to lose your money. Crypto assets, like any other investment, come with many risks and potential rewards. Fundamentally, cryptocurrency is an excellent investment, particularly if you want to gain direct exposure to the demand for digital currency.
Is Bitcoin And Cryptocurrency The Same Thing?
Bitcoin is a cryptocurrency that was designed to facilitate cross-border transactions, eliminate government control over transactions, and streamline the entire process without third-party intermediaries. The absence of intermediaries has resulted in a significant reduction in transaction costs. Satoshi Nakamoto, the creator of Bitcoin, created the first cryptocurrency in 2008. It began as open-source software for money transfers. Since then, plenty of cryptocurrencies have emerged, with some focusing on specific fields.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
