Cryptocurrencies have enjoyed increasing popularity and widespread adoption in the US. uu. and around the world in November, the cryptocurrency surpassed $3 trillion in market capitalization. About 16 percent of Americans have invested, traded, or used cryptocurrencies. that’s about 40 million people who have started to venture into digital currencies. many digital currencies, however, are highly volatile in the short term. bitcoin, for example, doubled in value in 2021, only to lose virtually all of its gains in the first month of this year alone.
For crypto users who aren’t worried about short-term volatility because they’re in it for the long haul, they’re now using their digital assets as collateral for loans. here’s what you should know about crypto loans and some of the pros and cons to consider.
Reading: Bitcoin as collateral
the most popular types of cryptocurrencies
There are thousands of different cryptocurrencies available. According to cryptocurrency news outlet coindesk, here are the top five in terms of market capitalization:
- bitcoin: the first cryptocurrency, bitcoin was created in 2008 by satoshi nakamoto, a pseudonym used by the person or group of people who invented it. bitcoin is by far the most popular and valuable cryptocurrency. it trades like btc on exchanges. as of 2021, around 114 million accounts worldwide held bitcoin.
- ethereum: ethereum is an open source decentralized blockchain that uses ether (eth) as its native cryptocurrency. Ethereum is the second largest blockchain by market cap, having recently reached over $368 billion. furthermore, as of 2021, more than 71 million cryptocurrency wallets held some ethereum.
- tether: Originally known as realcoin, this cryptocurrency is considered one of the “most popular currencies”. stable”. digital currencies categorized as stablecoins are directly pegged to another asset. Tether earned this distinction because it was one of the first cryptocurrencies to peg its market value to a flat, stable currency. users can redeem tethers for dollars. there are about 69 billion tethers in circulation.
- xrp: xrp is the native digital currency for ripple, a payment network and settlement system. the coin was created to reduce transfer fees and waiting times for financial institutions. there are about 47 billion xrp coins in circulation.
- terra: another “stablecoin” terra was created by singapore’s terraform labs, which was founded in 2018. terra it is considered stable because it is pegged to key currencies. terrausd is pegged to the US dollar in terms of value and is a scalable and profitable currency. terra’s native token luna has risen in value with tokens more than doubling in price since the beginning of 2022, from around $44 in January to $104.58.
how crypto loans work
A cryptocurrency-backed loan uses digital currency as collateral, similar to a security-based loan. The basic principle works like a home loan or a car loan: you commit your crypto assets to get the loan and pay it back over time. you can get this type of loan through a cryptocurrency exchange or cryptocurrency lending platform.
While you retain ownership of the cryptocurrencies you used as collateral, you lose some rights, such as the ability to trade them or use them for transactions. Plus, if the value of your digital assets drops significantly, you may end up owing much more than you borrowed in the event of a loan default.
People may consider crypto loans because of the benefits they provide and because they have no intention of trading or using their crypto assets in the near future. The acronym hodl, which stands for clinging to life, is a common refrain on crypto-focused online forums.
benefits of cryptocurrency loans
Compared to traditional secured loans, crypto loans have unique features that may make them attractive to some crypto enthusiasts:
- Low Interest Rates: While typically not as cheap as home or car loans, crypto loans are an affordable alternative to personal loans and cards of credit. you can often get a crypto loan with an interest rate of less than 10 percent.
- the loan amount is based on the value of the asset: in many cases, you can ask for borrow up to 50 percent of your portfolio value, but some exchanges go as high as 90 percent.
- choice of loan currency: depending on the platform and what you Whatever you need, you can usually get the loan funds in the form of US dollars or selected cryptocurrencies.
- No Credit Check: Cryptocurrency lending platforms and exchanges typically do not will run a credit check when you apply, making it an incredibly attractive financing option for people with poor credit or no credit history.
- Fast Financing: a Once you’ve been approved, you can get the funds from your loan in just a few hours.
- ability to lend cryptocurrency: many cryptocurrency exchanges offer “interest” accounts that allow you to lend your own digital assets and receive a high interest rate, sometimes higher than 10 percent.
things to consider before participating in cryptocurrency loans
There are some clear benefits to using your digital currency to secure a loan. But due to the nature of secured loans and cryptocurrencies, there are also some disadvantages:
- Margin Calls: A margin call occurs when the value of your collateral falls below a certain threshold and the lender requires you to increase your holdings to maintain the loan. In some cases, the lender may even sell some of his assets to lower his loan-to-value ratio. because cryptocurrencies are extremely volatile in the short term, the chances of this happening can be high.
- no access to your assets: as long as your loan has an outstanding balance, you cannot access your holdings to trade or transact. this can be a major problem if the currency price drops significantly or you urgently need cash.
- payment terms may vary: these loans generally work as installment loans and, depending on the crypto lending program, you may have less than a year to pay back what you borrowed. in other cases, you can create your own payment schedule. with shorter payment terms, it is crucial that you know in advance if you can afford the payments.
- not all digital assets are eligible: depending on the crypto lending platform you use , you may need to exchange your currency for an eligible asset. this may not be preferable if you want to keep your specific asset and it does not qualify as collateral on any platform.
- interest account funds are not insured: if you are lending your own digital assets, the funds in a crypto interest account are not insured like the money in your bank account. so if the trade fails, you could lose everything.
- withdrawals from the interest account can be slow: you can usually request a withdrawal from your crypto interest account when you want it. but depending on the platform, it could take several days for those funds to be released for you to use. this can be very damaging if the value of your assets falls rapidly and you cannot trade them.
the end result
If you need money and have sizable crypto assets, but don’t want to sell them, crypto loans may be an alternative worth considering. Crypto loans can be cheap and quick, and often don’t require a credit check. Also, if you have digital assets that you plan to hold for a long time, lending them through a crypto interest account could be a great way to maximize their value.
However, before getting involved in either side of crypto lending, it is important to understand the risks, especially what could happen if the value of your cryptocurrency drops quickly and significantly. If you’re considering crypto loans in any form, be sure to consider both the benefits and drawbacks, as well as all of your other options, before making a decision.
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