Crypto-backed loans give you instant liquidity. But they are also rife with new forms of risk. Investors should do their due diligence before going down this path.
Borrowers don’t actually control the digital assets they’ve pledged and can receive margin calls when the market declines, while the collateral seized to cover losses may end up worth less than it previously was.
Collateral
Many of these advantages apply to borrowers and lenders alike: borrowers get instant liquidity without credit checks or other eligibility criteria – while lenders can have access to funds in an instant with no other eligibility rules to apply.
Lenders earn returns without selling the cryptocurrencies they’ve invested in and pay no tax; they also retain title to the cryptos after the loan has been repaid.
But remember that crypto lending collateral is uninsured and is vulnerable to liquidation if the borrower defaults on loan repayment, or if the price of their crypto assets underlines. Selecting a decentralised crypto lending platform with self-custody or multi-signature provides the lender with lower counterparty risk and keeps user funds out of rehypothecation. But an additional way to lower risk for a lender and keep users’ funds safer are if the lender uses cold storage or deposit methods instead of an exchange account. Doing so reduces counterparty risk for the user, and they are less likely to face price volatility, while also keeping their users’ funds safer from the risk of rehypothecation. Using such an approach can help to mitigate such a risk. Doing so will mitigate them to some degree, compared with an exchange account which provides secure deposit methods. In other words, secure deposit methods instead of exchange accounts used as a source of funds keeps user funds safer from counterparty risk by reducing counterparty risk for the user, and they are less likely to see the price volatility, while also keeping their users’ funds safer from the risk of rehypothecation for counterparty risk reduction ex exchange account uses cold storage or deposit methods. Rehypotisation risk rehypotherm rehypothermic rehypothermia rehypothermically will mitigate them. Rehypothecation rehypothecation rehypoth risk rehypothecation rehypothecation risk are stored in cold storage, deposit methods are safer from being rehypoth than ex-ex exchange accounts with secure deposits secured. Rehypotisation risk cold storage is a way to produce a safer lending platform that can potentially protect users. Rehypothecation risk rehypothecation risk rehypotization.
Interest Rates
Borrowing money with cryptocurrency can be an instant way to acquire cash while keeping your digital assets, but if you’re interested in dipping into this world, be careful to find reputable sources. Otherwise, you could find yourself in a messy legal situation. Step One: find a loan platform that accepts your cryptocurrency. Step Two: connect your wallet so your assets can be used as collateral for loans.
After that, you’ll have the ability to generate interest by providing liquidity for others. Your deposited assets will remain locked and unusable for trading or other purposes for the duration of your loan, which would be a pain if, say, the price of crypto suddenly falls, or you unexpectedly need some quick cash. But unlike installment loans, since crypto loans work more like traditional installment loans, with shorter payment terms than credit cards or personal loans and a lower interest rate than either of those.
Repayment Terms
Most cryptocurrency lending platforms give you the ability to choose the amount and rate of the loan, and in most cases you can set repayment conditions. And some platforms let borrowers use their loans as collateral in case they fail to repay by guaranteeing those loans with so-called stablecoins, which have value pegged to real-world assets such as commodities or currencies, to reduce the risks associated with price fluctuations.
Some give you a line of credit where you can take out funds up to an agreed limit, and then pay interest only on the amount actually borrowed; others offer flash loans that have to be repaid immediately; both models could be used for arbitrage trading.
Some of those platforms have higher interest rates for borrowers with bad credit history, but their rates are still much lower than, say, credit cards or personal loans. Moreover, many do not require complicated credit checks or KYC procedures. For people without access to the traditional financial system, this could be an opportunity for them to borrow money.
Taxes
Every cryptocurrency lending platform is different but many offer approval in a matter of seconds, with the repayment terms locked in via smart contract. Certain exchanges also have lending limits based on the value of your collateral; you can use a loan for investment or personal use, and with an investment loan you would be able to deduct the interest payment from taxes.
Borrowing fiat using your cryptos as collateral is a great way to access cash without paying a capital gains tax, which makes this strategy ideal for those who want to stay invested but diversify into fiat just in case.
As a lender, this allows you to earn the same return as you’d get from accounts paying high interest, at a potentially significant premium. Crypto-backed loans can be a good solution for unbanked consumers and those who are self-employed, as borrowers (since they ‘waive’ the need to undertake a credit check); and as a lender who wants to provide a ‘credit check waiver’. However, if your loan cannot pay the margin calls, the lender of the crypto-backed loan will require the collateral, which is to be liquidated on your behalf. It is better to be safe than sorry, so do your research before you invest.