by Jake Wengroff
While Bitcoin and other cryptocurrencies continue to grow as investment opportunities, new digital services are springing up to allow crypto asset owners to extract more value from their digital currencies. Crypto lending has emerged as a category for asset owners — either to use cryptocurrency as collateral to borrow money, or to lend cryptocurrency and earn interest on it. But is it a good idea? What are the risks? Read on to learn what you need to know.
Cryptocurrency as Collateral for a Loan
A crypto-backed loan is a collateralized loan that you can get through a crypto exchange or crypto lending platform. The loan functions similarly to a mortgage or car loan in that you’re using an asset — in this case, your cryptocurrency — to secure your loan funds.
Some key features of crypto-backed loans include the following:
Interest Rates Are Relatively Low — for Now
At the moment, crypto-backed loans carry low APRs, perhaps to encourage industry-wide adoption. However, the interest rates are still not as low as those for a mortgage or car loan, which are tied to the prime rate.
You’re Limited on How Much You Can Borrow
Many platforms allow you to borrow up to 50% of the value of your cryptocurrency — though some go as high as 90%. You can receive your loan funds in the form of fiat currency (such as U.S. dollars) or other digital currencies.
There’s No Credit Check
As the category is so new, there is typically no credit check involved, so consumers with less-than-stellar credit can receive approval. However, it is unknown if the loan would be reported to the major credit bureaus, so it wouldn’t be a strategy to improve your credit.
Funding Is Fast
Crypto loans are typically funded the same business day, sometimes within a few hours. This is in stark contrast to the more traditional loan application process, which often takes at least two weeks.
On the flip side, many crypto platforms allow investors to earn interest on their crypto assets when they are lent to larger, institutional borrowers. This practice has been around on Wall Street for decades, and is known as securities lending. It’s also similar to the traditional bank savings or deposit account, in which the bank takes your funds and issues loans to other customers, paying you interest for that privilege.
Benefits of Crypto Lending
Crypto Savings Accounts Offer Much Higher Returns
As of June 2021, the average online high-yield savings account annual percentage yield was 0.45%. In contrast, crypto interest-bearing accounts currently go as high as 12.7% APY. That’s even higher than the average return of the S&P 500 (more than 7% since 1957).
You Don’t Have to Lock in Your Assets
Unlike a certificate of deposit, you don’t need to commit your money for a certain amount of time. While there may be some limitations, you can generally get your funds back shortly after you request them.
Risks of Crypto Lending
There are some clear benefits to cryptocurrency lending, either as a borrower or as a lender. However, there are also some significant drawbacks to keep in mind before you decide to proceed.
Collateral Is Locked in
Because of the price volatility, collateral is often locked in if you are using crypto to secure a loan. Holdings cannot be liquidated in an emergency, and crypto cannot be sold if the price drops.
Varying Repayment Terms
Further, repayment terms can vary widely, and often the loan term is as little as 12 months.
Restrictions on Eligible Coins
Finally, not all coins are eligible. Some platforms have restrictions on the digital currencies that are allowed to be used as collateral for loans or on the digital currencies that can be loaned out.
A Title Registry as a Way to Prove Ownership
As crypto assets begin to proliferate through more traditional financial transactions, such as lending, crypto owners and service providers can benefit from a third-party record of ownership. TransitNet is creating the industry’s first offchain title registry of record for digital wallets. More than an additional layer of protection for cryptocurrency assets, the title registry also provides proof of ownership when collateral is needed for lending and other financial transactions.
Join the forefront of the new crypto infrastructure.
Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, Jake covers such topics as security, mobility, e-commerce, and IoT.
US News – What Is Crypto Lending?
TokenTax – 8 Best Crypto Loan Platforms