All around the world, people have become more and more interested in using cryptocurrency. In November of 2021, the market capitalization of cryptocurrencies went over $3 trillion. If we’re gonna be looking at the numbers, about 16% of Americans have bought, sold, or invested in cryptocurrency. This means that about 40 million people have started to use digital currencies. 

One downside of cryptocurrency is that many digital currencies are very volatile in the short term. For example, Bitcoin’s price doubled in 2021, but it lost almost all of those gains in just the first month of this year.

If you’re the kind of investor who’s in it for the long haul and don’t care about short-term price fluctuations, you’ve probably heard of the term “crypto lending,” where investors use their digital assets as collateral for loans. 

In this article, we’ll go over the concept of crypto lending — what it is, how it works, and many more!

We’ll be covering these specifics in this guide: 

• What Is Crypto Lending? 
• How Does Crypto Lending Work? 
• Different Types Of Crypto Lending
• PROs & CONs of Crypto Lending 
• How To Get A Crypto Loan 
• How To Lend Your Crypto 
• Key Takeaway

Let’s get started! 

What Is Crypto Lending?

In a nutshell, crypto lending is the approach used where deposited cryptocurrency is then loaned to borrowers in exchange for regular interest payments. Payments are usually made once a day, once a week, or once a month. 

Different platforms have different ways of managing loans. Crypto lending services can be found on both centralized and decentralized platforms, but the basic premises are the same.

You don’t necessarily need to be a borrower. You can also make money without doing anything by putting your crypto in a pool that manages your money. Depending on how trustworthy the smart contract you use is, there is usually not much chance that you will lose your money.

How Does Crypto Lending Work? 

It’s not enough that you know what it does. The more important question is, “How exactly does it work”? 

Crypto lending usually involves three people: the lender, the borrower, and a DeFi (Decentralized Finance) platform or crypto exchange. Most of the time, someone who wants to borrow crypto must put something up as collateral.

The basic idea is the same as a mortgage or car loan: you put up your crypto assets as collateral to get the loan and pay it back over time.

Even though you still own the cryptocurrency you put up as collateral, you forfeit some rights, like the right to trade or use it to pay for things. Also, if the value of your digital assets drops a lot, you may have to pay back more than you borrowed if you don’t pay back the loan on time.

People may look into crypto loans if they want to take advantage of their benefits and don’t plan to trade or use their crypto assets soon. HODL, which stands for “hold on for dear life,” is a common phrase in online forums about cryptocurrencies.

Different Types Of Crypto Lending

It’s crucial to understand the different types of cryptocurrency lending, so you don’t mess up because you were too excited to come up with a decision. There are four types of crypto lending: 

Collateralized Loans

A collateralized loan is a type of crypto loan that requires a deposit of cryptocurrency used as security for the loan. Most platforms need over-collateralization, which means that borrowers can only get a certain amount of the collateral they put up (typically below 90 percent loan-to-value). The lower the loan-to-value ratio (LTV), the lower the interest rate, and the less likely it is that you will be called on your margin.

Uncollateralized Loans

Uncollateralized loans are less common, but they work the same way as personal loans. To be approved, a borrower must fill out a loan application, have their identity checked, and go through a review of their creditworthiness. The lenders are more likely to lose money on these loans because they have nothing to sell if the borrower doesn’t repay the loan.

Flash Loans

Flash loans are usually available on crypto exchanges. They are instant loans that are borrowed and paid back in the same transaction. These are very risky loans that are typically used to take advantage of market arbitrage opportunities, like buying cryptocurrency on one market for a lower price and selling it right away on another market for a higher price, all in the same transaction.

Crypto Line Of Credit

There are some platforms that offer a cryptocurrency line of credit instead of a traditional loan with a set length of time to pay it back. This is a type of secured loan that lets you borrow up to a certain percentage of the collateral you put up. There are no set terms for paying back the loan; you only pay interest on the money you take out.

PROs & CONs Of Crypto Lending

Now let’s talk about what can make or break your choice regarding crypto lending. Just like any other investment opportunity, deciding whether to engage in crypto lending or not can either build or destroy your portfolio. So you must make sure that you go through the PROs and CONs before doing so. Here are some of this method’s benefits (and possible drawbacks). 

PROs Of Crypto Lending 

Crypto loans are different from traditional secured loans in a few ways that some crypto fans may find appealing:

• Low-interest rates. Even though crypto loans aren’t usually as cheap as a mortgage or car loans, they are still more affordable than personal loans and credit cards. Most of the time, the interest rate on a crypto loan is less than 10%.
• The amount you can possibly borrow is highly dependent on the value of your assets. In most cases, you can borrow up to 50% of the value of your portfolio, but some exchanges let you borrow up to 90%.
• Choice of currency for the loan. Depending on the platform and what you need, you can usually get the loan money in the form of U.S. dollars or specific cryptocurrencies.
• A credit check is not required. When you apply, most crypto lending platforms and exchanges won’t check your credit, which makes it a great way to get money for people with bad credit or no credit history.
• Fast funding. You can get your loan money in as little as a few hours after being approved.
• Ability to lend crypto. Many crypto exchanges let you open “interest” accounts that let you lend your own digital assets and get a high APY in return, sometimes up to 10%.

CONs Of Crypto Lending

• Your collateral puts you at a high risk of being liquidated. Even when loans are backed by a lot of collateral, crypto prices can drop quickly, which can lead to liquidation.
• It is possible to attack smart contracts. Poorly written code and back-door exploits can cause you to lose the money you borrowed or the collateral you put up as security.
• Taking out loans and giving them out can make your portfolio riskier. Diversifying your investments is a good idea, but doing it through loans adds more risk.
• Not all cryptos are eligible. Depending on the crypto lending platform you use, you may have to trade your currency for an eligible asset. This might not be the best option if you want to keep your asset, and it can’t be used as collateral anywhere.
• You can’t get to your assets. You can’t trade or do business with your holdings as long as you owe money on your loan. This could be a major problem if the currency’s value falls significantly or you require cash quickly.

How To Get A Crypto Loan 

 If you’ve gone through all the points that we have mentioned above and you believe that the advantages outweigh the limitations, you can proceed with the next part of our guide. 

If you want to get a crypto loan, you’ll need to sign up for a centralized lending platform (like BlockFi) or connect a digital wallet to a decentralized lending platform in order to apply for a crypto loan. The next step is to choose the type of loan you want and how much you wish to borrow. The amount that you can borrow would depend on the collateral and the amount you put down.

For the transaction to go through, you will have to put the collateral into the platform’s digital wallet. The borrowed funds will then be sent right away to your account or digital wallet.

Most loans can be approved immediately, and the terms of the loan are locked in with a smart contract.

How To Lend Your Crypto

On the other hand, you can also choose to be a crypto lender. In this case, users will have to sign up for a lending platform, choose a cryptocurrency to deposit, and transfer funds to the platform. Interest can be paid in-kind or with the platform’s own token on a centralized crypto lending platform. Interest is usually paid in kind on a decentralized exchange, but there may also be bonus payments.

Key Takeaway

If you need funds and have a lot of cryptos that you don’t want to sell, you might want to think about crypto lending. Crypto loans can be fast and cheap, and most of the time, you don’t even need to check your credit. Also, if you plan to keep digital assets for a long time, lending them out using a crypto interest account can be an excellent way to get the most out of them.

Before you lend or borrow cryptocurrency, you should know the risks, especially what might happen if the worth of your cryptocurrency falls quickly and significantly. If you’re thinking about either type of crypto lending, you should think about the pros and cons as well as all your other options before making a choice.