Bitcoin has evolved so much since 2009 and individuals can now use their cryptocurrency as collateral for loans from crypto exchanges and dedicated firms. Crypto traders can gain interest by lending their Bitcoin to others in need of a cash injection.
But are Bitcoin loans safe and can they actually benefit individuals? Traditional FIAT loans are becoming increasingly difficult to obtain and the repayment interest rates are increasingly higher. Bitcoin loans are the answer to several tough questions when choosing to take out a loan, but how does crypto lending work? Let CoinCollecting.ws explain it for all to understand.
What is Crypto Lending?
Crypto lending is a fairly new concept and isn’t all that dissimilar to a securities-based loan such as one that uses collateral. The principle is simple – an individual pledges a number of cryptocurrency assets such as Bitcoin in order to obtain a loan that will be repaid over time.
You will still retain ownership over your cryptocurrency assets but will more than likely lose some rights as part of the terms of the loan. Common Bitcoin loan terms include the inability to trade those assets or use them in any other transaction. Like any loan, there is some inherent risk. Especially considering the volatility of an asset like Bitcoin. If the value of the world’s largest cryptocurrency by market share were to plummet – like when Bitcoin dropped from $60,000 to $30,000 in a month – then the loan repayments will dramatically increase as the worth of your Bitcoin does.
Bitcoin loans have gained popularity owing to low interest rates. The US Federal Reserve reports that the average interest rate of a credit card in the first quarter of 2021 is 15.91% – comparatively, the average Bitcoin loan in August 2021 was a mere 5%.
The Benefits of Crypto Lending
Despite some level of risk, there are also several major benefits to a Bitcoin loan. In fact, in comparison to traditional securities loans, a Bitcoin loan has some rather unique advantages to offer. The interest rates of a Bitcoin loan are very low – not as low as a mortgage but certainly much lower than a payday or short-term loan. Arguably, a Bitcoin loan is an alternative to a credit card or personal loan.
Another added benefit is you can’t really loan too much. Bitcoin loans are based on the actual worth of your assets – the total asset value. Typically, you’d be offered anywhere between 30 – 90% of your total value as a loan. You can also choose the FIAT currency or cryptocurrency you need as a loan, so it’s not just strictly US dollars.
Bitcoin loans are also an alternative for those with poor credit or zero credit history. This is because most crypto exchanges do not conduct a credit check when considering a Bitcoin loan application. Bitcoin loans are processed within hours and in the last year or so, some exchanges even let users lend their own assets to others and are awarded interest in return.
Where to Find a Bitcoin Loan
There are more Bitcoin loans available online than ever before and they are not hard to locate, even some of the major crypto exchanges like Binance offer interest accounts and Bitcoin loans. There are also dedicated loan platforms offering high APY interest accounts and fair Bitcoin loans. Most Bitcoin loans will be Custodial Loans – whereby the lender owns the private keys – but some providers offer a Non-Custodial Bitcoin loan where the owner still keeps their private key and are enforced via decentralized smart contracts.
Crypto.com was founded in 2016 and has been offering loads of cryptocurrency services to global clients. Their crypto loans come with an 8% annual interest rate or 12% for lower stakes. Like many crypto loans, the credit offered to users will be given in the form of a US dollar pegged stable coin like USDT or TrueUSD.
We found you can borrow up to a maximum of 50% of your total Bitcoin assets. You’ll have 12 months to repay your loan or else Crypto.com will liquidate your holdings. Besides loans, Crypto.com also provides interest accounts with Bitcoin interest up to 10% per annum.
Binance is the world’s largest cryptocurrency exchange and offers a plethora of unique crypto features that many exchanges do not. Among those features are crypto loans with an hourly interest rate that can be repaid at any time. Binance offers UDST and BUSD through their lending platform and the tokens can then be converted to any FIAT currency by sending it to your bank account. A Bitcoin loan at Binance offers up to 65% of the value of your spot account.
BlockFi is arguably the most well-known service offering interest accounts. Founded in 2017, BlockFi are bank-like in their offerings of cryptocurrency savings accounts. There is typically a welcome bonus on offer at BlockFi and they are easily the most trusted provider of Bitcoin loans. We found the Bitcoin interest rate to be as low as 4.5% and you can borrow up to 50% of your total asset value.
Factors to Consider with a Bitcoin Loan
One of the biggest factors to consider is how fast you are going to be able to pay back the loan. Remember that you’ll most likely have no real access to your assets – you’ll own them, but you can’t do anything with your Bitcoin until you repay the loan. This is important to consider because that also means you won’t be able to sell your Bitcoin should you choose to do so during a large downturn. The margin call is another very important factor relating to this issue. The margin call is the threshold in which the lender requires that you increase your capital because it has dropped too far during a dip. In some instances, a Bitcoin lender will sell some of your assets if necessary.
Also, when loaning your assets out in an interest account, your funds will not be insured. The cryptocurrency market is still largely unregulated and if the exchange were to fail, you would lose everything, so pick your exchange wisely. For example, a small and new exchange may not be the greatest option for an interest account.
Bitcoin is without a doubt truly part of the mainstream in 2021. Further acceptance in the finance world can be seen in the addition of Bitcoin loans and interest accounts. These interest accounts are perfect for creating a passive income from wise crypto investments while Bitcoin loads are ideal for individuals with poor credit ratings or no credit rating at all. Interest rates for lending Bitcoin can be as high as almost 20% APY while interest rates for borrowing can be as low as 5% – you can see why more and more investors are taking an interest in this new service.
Bitcoin Loans FAQS
💰 What’s the difference between a traditional loan and a Bitcoin loan?
While traditional loans and Bitcoin loans share many similarities in the sense that they are the same basic concept, there are also many important differences. Obvious differences can be seen in the interest rates, repayment terms, and application requirements when compared to each other.
💱 What other crypto loans are there?
Bitcoin loans are by far the most common and popular form of crypto loan on the market. However, it is not the only cryptocurrency available to be used as collateral in obtaining a loan from a crypto exchange or lending provider. Several major cryptocurrencies are able to be used as collateral, but which tokens will vary between the various exchanges and lending services.
📉What happens if Bitcoin dips?
It’s the fear all crypto traders face – market volatility. As a cryptocurrency Bitcoin is subject to wild volatility and sometimes Bitcoin can see large downturns. Bitcoin loans can be affected by market dips and that can have consequences on your collateral. Be sure to check the terms of a Bitcoin loan to see what affects a market dip will have on the loan.
🔒Is a Bitcoin loan safe
As with any form of loan, be it a traditional or a Bitcoin loan, there is a particular level of risk associated. There are a number of unique factors of Bitcoin loans that produce risk too. Deciding whether a Bitcoin loan is safe is entirely up to the individual user depending on their assessment of the lender, goals of the loan, and predictions of market stability.
📊 How big a Bitcoin loan can I apply for?
A Bitcoin loan size is based on one main factor and that factor is the limitation of a Bitcoin loan size. The size of a Bitcoin loan can be almost any size but will never exceed the total value of your collateral. You’ll need to read the Bitcoin terms closely to see how big a loan you can be accepted for.