What Is Crypto Lending?
The Cryptocurrency industry is growing with every passing day. The digital asset that started as a tend and risky venture is taking the shape of a real currency with robust and wholesome financial features.
Cryptocurrencies are recently being used as a lending and borrowing instrument like any other object with financial value. This digital loaning system has already spread out a huge business in the Crypto market.
With this process, you may earn money by using Crypto lending without selling or exchanging your Crypto assets. Thanks to Crypto lending services, it is simple to obtain loans using digital assets as collateral.
This article will discuss everything you need to know to start lending or borrowing Cryptocurrency.
What Do You Mean By Crypto Lending?
A kind of decentralised finance known as Crypto lending enables investors to lend their Cryptocurrency to other borrowers. In return, they will get interest payments known as “Crypto dividends.”
Along with accepting Cryptos, several services that focus on Crypto loans also take stablecoins.
Depending on the platform, interest rates might range from 3 to 7% and, in certain situations, can even reach 17%.
Additionally, borrowers can use their bitcoin as collateral or a guarantee for loan repayment. This implies that the platform can recoup its losses if the borrower defaults on the loan.
Are Crypto Lending Platforms Risky?
Crypto lending platforms are different from the Crypto exchange ones. Crypto exchanges like the crypto boom are extremely secure platforms where you can trade all your digital assets. However, not all such platforms offer the opportunity to lend Cryptocurrencies.
Given below are some of the major risks you might face while using Crypto lending platforms—
Risk Of Insolvency
In contrast to bank deposits, Crypto savings accounts are not covered by statutory deposit insurance in the majority of industrialised nations.
The Federal Deposit Insurance Corporation offers this insurance in the United States (FDIC).
For quantities that are within the statutory insurance limitations, there is extremely little chance that you will lose your money. But keep in mind that you receive an actual negative return in exchange for this assurance.
Actions Of The Lender
Crypto lending platforms (CeFi) accept Cryptocurrency from both savers and borrowers. The agreements with CeFi providers define what they are allowed to do with the monies that have been given.
They mostly lend them to Cryptocurrency exchanges, hedge funds, and other institutional investors via their online platforms and over-the-counter (OTC) exchanges.
This is a counterparty risk because if the counterparty to these trades is unable to deliver the bitcoin, your platform provider may go out of business.
The majority of users of Crypto lending are not usually aware of the risks that the platform provider really assumes in OTC transactions, even if the platform will strive to minimise this risk by over-collateralizing the assets it lends out.
Storage Risks
Although there have been cyberattacks on digital exchanges, no one has yet lost any Cryptocurrency. How and where you keep your Cryptocurrency is the most important factor.
Cooperation between large Crypto lending platforms and reputable custody service providers like Bitgo. Some CeFi providers have private insurance coverage that addresses the possibility of theft.
Should You Opt For Crypto Lending?
Lenders can earn passive income from their Crypto investments at interest rates that are far greater than those offered by conventional lenders.
They must also be aware of the dangers they are assuming by entrusting a security protocol like the Bitcoin network with their Cryptocurrency.
Just three instances of bitcoin lenders dealing with serious liquidity issues are Voyager Digital, BlockFi, and Celsius.
These Cryptocurrency lenders provided hedge fund Three Arrows Capital (3AC) with loans totalling hundreds of millions of dollars in cash and bitcoin, and they were revealed as a result of 3AC’s default.
Recently, Voyager Digital sought Chapter 11 bankruptcy protection; Celsius is insolvent.
Since there is no federal insurance for Crypto deposits, borrowers must be ready for a special set of risks. The contract contains liquidation triggers, such as an LTV of more than 75%, which would cause the borrower’s collateral to be automatically liquidated.
Typically, the Federal Deposit Insurance Corporation protects each member bank’s savings accounts up to a maximum of 211,336.07GBP.
Wrapping It Up!
With Crypto lending, interest rates can vary considerably, and the amount you get will depend on the platform you use and the kind of commodity you lend.
Investors can sell the Cryptocurrency assets to recoup losses if a borrower is unable to or opts not to repay the loan.