Crypto Lending: Redefining Banking
Many crypto holders sometimes need to spend their coins but don’t want to sell them because of the fear of missing out in the future. A few years ago, an opportunity to use the coins without selling them was presented. It is called crypto lending.
Here’s how it works: you leave crypto collateral for temporary storage, receive the loan, then spend it, and repay it whenever you want to end the loan period. The service that was only possible at banks before has become reality in the crypto market, and it’s available in just a few clicks — there are no credit checks here so you receive your loan almost instantly.
Crypto lending services proliferated in 2021 when digital assets were in the focus of public attention. Let’s see how they work and how you can get a crypto loan on favorable terms.
What Is Crypto Lending?
Crypto lending is when you deposit your coins and get some digital tokens in return. In this regard, it’s close to how banks work. However, in traditional financial institutions, you have to file an application and go through multiple credit checks; this may take days, and you never know the result. Even when you receive the loan, you will have to make frequent payments and start receiving calls from the banks if you miss the payment date.
Crypto loans revolutionized lending — now, everyone who has cryptocurrency can borrow money. The hardest step here is probably picking the platform; once it’s done, taking a loan is possible in just a few clicks. Before you deposit collateral anywhere, make sure you’ve understood all the conditions and know what will happen to your funds, how you can repay the loan, and in what cases collateral can be liquidated. Here, find our review of the best crypto lending platforms.
How to Borrow Crypto?
We’ll explain how you can take a crypto loan using the example of NOW Loans — a lending service that we created to let our users benefit from crypto without selling it.
The setup process takes just a few minutes. First, choose the loan and the collateral currencies, indicate the amounts, and enter your email and the password to sign up. Deposit crypto and receive your loan shortly. As the time goes, you can log in to your account and track the loan size, the interest, and the level of the liquidation price.
The size of your loan depends on the size of your collateral and the loan-to-value (LTV) ratio. Ours is 50%, meaning that if Bitcoin costs $40,000, you will receive $20,000 in USDT as a loan. There are no set payment dates — keep the loan for as long as you want to repay it whenever ready. The interest will be also paid at the end of the loan period — no worries about the monthly payments. For more details, see this article.
The other crypto lending services work in a similar manner. The LTV ratio varies, but the principle is the same. Note that if this ratio is high, you will receive a bigger loan, but your collateral will be at a higher liquidation risk: if the LTV is 80% and the price of the collateral asset drops by just 20% (which is quite possible in crypto), collateral will be liquidated.
Why Do People Take Crypto Loans?
The reasons for this vary, but the most recent one is the desire to profit. When a bull run starts, users want to have more free money to invest it in the growing market. By taking a loan, you can buy a rapidly appreciating coin and if things go as planned, you will close the loan period with more money than you had at its beginning.
The same possibilities are open to those who expect the crash of the market. In some lending services, there is a shorting option — bear loans where you can borrow Bitcoins for stablecoins, sell them at the peak and buy more at the dip, then repay the loan and keep the difference.
The most important thing here is that when you deposit collateral, these coins still remain yours, and you will fully benefit from their growth. When you repay your loan, the same amount of coins will be returned to you as deposited. By taking a crypto loan, you don’t only profit from the growth of the collateral asset, but also from another soaring crypto that you invested in.
Crypto Lending and the Global Change
Crypto lending provides the exciting opportunity for better access to financial services worldwide. There are billions of people lacking it due to poor financial infrastructure, their citizenship, age, for political reasons, etc. The traditional system fails to provide all people with equal access to finance.
Crypto lending proposes a solution to this problem. People can access loans irrespective of their nationality, age, and location — all they need is a computer with an internet connection, and some crypto. Anyone can receive a loan without credit checks and approval from institutions and authorities. This is a part of the revolution that cryptocurrency promised to drive — giving people more financial freedom and the opportunity to access finance no matter their status.