What is crypto lending?

Cryptocurrency Lending is the process in that cryptocurrency is loaned to borrowers in exchange for regular interest payments. Payments are made in the form of cryptocurrency, which is usually stored and totaled on a daily, weekly or monthly basis.

There are two main types of cryptocurrency lending platforms: decentralized cryptocurrency lenders and centralized cryptocurrency lenders. Both offer access to high-interest rates, sometimes as high as 20% annual percentage return (APY), and both typically require borrowers to post collateral to access a crypto loan.

What is crypto lending?
What is crypto lending?

KEY SHOTS

  • Cryptocurrency loans pay high-interest rates for deposits.
  • Crypto loans offer access to cash or crypto through secured loans.
  • Crypto loans are inherently risky as a margin call may occur if asset prices fall.
  • Cryptocurrency lending platforms act as intermediaries for lenders and borrowers, and both centralized and decentralized markets are available.

Understanding Crypto Lending

Cryptocurrency lending platforms offer investors opportunities to borrow against stored crypto assets and the ability to lend cryptocurrencies to earn interest in the form of crypto rewards. Lending platforms became popular in 2020 and have since grown to billions in total value locked up on various platforms.

  1. Cryptocurrency loans have two components: deposits that earn interest and cryptocurrency loans. Savings accounts work much like a bank account. Users deposit cryptocurrency and the lending platform pays interest up to 8% APY (depending on platform and cryptocurrency). The platform may use the deposited funds to lend to borrowers or for other investment purposes.

2. Crypto loans are typically offered as secured loan products that require users to put up a minimum of 100% (and up to 150%, depending on the lender) in crypto collateral in order to borrow cash or cryptocurrency.

3. Like traditional loans, interest rates vary by platform and require monthly payments. Unlike traditional loans, cryptocurrency loan terms can be as short as seven days and as long as 180 days and charge an hourly interest rate, like Binance.

4)Then there are other lenders that offer an unlimited line of credit instead, such as Nexo, which offers 0% APR.

Risks of cryptocurrency lending

Cryptocurrency loans are inherently risky for both borrowers and lenders, as loans and deposits are tied to the ever-volatile crypto market. As the recent Celsius debacle unfolded, billions of dollars in deposits were frozen overnight, leaving crypto enthusiasts less than thrilled.

Here are some risks of crypto lending:

Margin calls

When users pledge collateral and borrow against it, a decline in the value of the collateral posted may trigger a call for additional payment. This happens when the LTV of the crypto loan falls below the agreed rate. When this happens, borrowers either have to put up more collateral to bring the LTV down again or risk liquidation.

Illiquidity

When crypto assets are stored on crypto lending platforms, they usually become illiquid and cannot be accessed quickly. Although some crypto lending platforms allow lenders to withdraw deposited funds relatively quickly, others may require a long waiting time to reach them.

Unregulated

Cryptocurrency lending platforms are not regulated and do not offer the same protection as banks.

 For example, bank deposits in the US are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, and if the bank becomes insolvent, user funds are protected up to that limit.

 Cryptocurrency lending platforms that have solvency issues have no protection for users and may result in loss of funds.

High-interest rates

Although some crypto loans offer low rates, most crypto loans charge more than 5% APR, with some charging up to 13% APR (or more).

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Disclaimer:Crypto products are unregulated as of this date in India. They could be highly volatile. At Unocoin, we understand that there is a need to protect consumer interests as this form of trading and investment has risks that consumers may not be aware of. To ensure that consumers who deal in crypto products are not misled, they are advised to DYOR (Do Your Own Research).