Crypto Lending is a way for traders to get liquid funds without selling their existing cryptocurrency. Instead, they use their cryptocurrency as collateral for a cash loan or a more stable coin. In fact, cryptocurrency loans are a relatively young thing, so the risks are incredibly high. Who do you think is interested in cryptocurrency loans in the first place? There are three categories of users:
Traders, who make several dozen digital currency transactions a day.
Miners, who make a profit from finding new blocks of the network in cryptocurrency.
People, who, for one reason or another, cannot get a loan from a bank. For example, they have a considerable amount of overdue debt or do not meet the bank’s requirements for borrowers.
Despite the fact that cryptocurrency loans are not as widespread as bank loans, they are already in high demand. If you earn the bulk of your income in cryptocurrency, cryptocurrency loans can be a very good way to get the amount of money you need for whatever you need. However, you’d better read all your risks first before applying for such a loan in all other cases.
A trader can use cryptocurrency lending if they are confident about the future growth of their cryptocurrency or do not want to sell it. Interest rates on bitcoin loans vary but are often very competitive, with some offering up to a 12% annual percentage yield (APY). These platforms also often lend assets against collateral, usually in a cryptocurrency, called cryptocurrency loans.
Crypto Lending Features:
Capital turnover. The more capital a trader spins, the more he will earn (or lose if he is unlucky). A trader can invest cryptocurrency in buying new coins, cloud mining, or ICO projects.
Arbitrage. A borrower can lend cryptocurrency at a higher interest rate than his own. In this case, a serious profit can be obtained only with significant volumes of loans and a large number of transactions (as a rule, they are concluded with the help of bots). The scheme works but is very risky – a sub-creditor may not get his cryptocurrency back.
Lack of banking alternatives. In theory, a borrower could negotiate a Crypto Lending with a 2-5% overpayment. But more often than not, the average interest rate on Crypto Lending is 25-50% per annum. So it is profitable to take such loans only for the short term. Although even under such conditions, for many users who are rejected by banks, this is the only opportunity to get credit funds for purchases or business needs.
Decentralized vs. Centralized Lending
For most cryptocurrency investors, a centralized cryptocurrency exchange is one of the most important tools for buying, selling, and transacting.
- CEX are centralized crypto exchanges.
- DEX are decentralized crypto exchanges.
Centralized exchanges (CEX) and decentralized exchanges (DEX) represent the majority of cryptocurrency exchanges available today. Both perform the same basic function: offering cryptocurrency in exchange for fiat currency or another cryptocurrency. What makes them different, however, is how they perform this function.
How Do Decentralized Exchanges Work?
A decentralized exchange uses smart contracts (automatically executed protocols) to facilitate trading between people, but the exchange has no control over their coins. DEX handles this in one of three ways: an in-chain order book, an off-chain order book, or an automated market maker approach. In an in-chain order book, every transaction is written to the blockchain. It’s not just the purchase itself but also a request to buy or cancel an order. It’s ideal for decentralization, but putting everything on the blockchain can make it more expensive and slower.
Investing in Cryptocurrencies by APY
An APY is an annual rate of return on an investment that takes into account compound interest that accrues or grows with the balance. Compound interest includes the interest earned on the initial deposit plus the interest accrued on that interest.
How Can Crypto Lending Change the Crypto Industry
The United States still occupies the largest share of the cryptocurrency lending market. Europe and Asia show the most active growth among other segments: customers from these regions accounted for about 25% of the loan portfolio by the end of the year. Their combined share grew for three consecutive quarters.
In Asia, customers from China, Hong Kong, Singapore, and Japan show the greatest interest in lending on the cryptocurrency market. In Europe – from the UK and Switzerland. At the same time, European investors are interested in lending to their holdings for additional income. Borrowers from Asia prefer to borrow in fiat to replenish working capital or upgrade equipment if we are talking about mining companies.
Cryptocurrency is money and, therefore, it can be lent and borrowed. Of course, even the top cryptocurrencies are very volatile in the current period, so these transactions are associated with high risk for both the lender and the borrower. In addition, in many countries, the blockchain industry operates virtually outside the law. But this is all a temporary phenomenon, and in the future, credit in bitcoins or BNB will become commonplace. Well, in the meantime, we have what we have, and whether to take a Crypto Lending or not is a personal matter for everyone.