Cryptocurrency is a digital currency in which its transactions are monitored by a system using cryptography as opposed to a central authority like traditional banks. As its popularity grows, cryptocurrency will find its way into many traditional forms of money lending, including loans. In crypto lending, a sum of cryptocurrency is used as collateral. You pledge a certain amount of your cryptocurrency assets to receive the loan, then over time, you pay it back. Unlike traditional loans, you can gain access to your funds in as little as a couple of hours.
In recent years, cryptocurrency has made massive waves in the economy and finance markets.
It is defined as a digital currency in which its transactions are monitored by a system using cryptography as opposed to a centralized authority like traditional banks. A common type of cryptocurrency that has been a hot topic recently due to its rise and fall, is bitcoin.
However, this has not deterred people from viewing cryptocurrency as the potential new method of exchanging monetary value from person to person.
Other popular available cryptocurrencies are Ethereum, XRP, Cardano, and Stellar. As its popularity grows, cryptocurrency will find its way into many traditional forms of money lending, including loans.
What is Crypto Lending?
Chances are at some point in your life you have heard of loans. There are many types of loans, each with different terms and interest rates.
Generally, people take out loans for either unforeseen financial needs or for a big purchase like buying or renovating a home. There are many methods loan lenders use to keep the person who took out the loan accountable for paying it back.
Often these loan lenders will take something as collateral to ensure repayment. Crypto lending functions under a collateral system. In crypto lending, a sum of cryptocurrency is used as collateral. You pledge a certain amount of your cryptocurrency assets to receive the loan, then over time, you pay it back.
Crypto lending is more appealing to some than traditional loans because, for the most part, they had no intention of trading their cryptocurrency assets.
Unlike your standard securities loan, which used investments as collateral, crypto assets are generally held by the holder forever. While some would want the option to trade or sell an investment, many will not trade their crypto assets under any condition.
The Ups And Downs of Crypto Lending
Like all things, cryptocurrency has its ups and downs. It’s a bit too early to say if it is more advantageous to use crypto lending over traditional loan services, but it is certainly not something that would be surprising.
Upsides
1. Low-interest rates. Loan interest rates come in many sizes. When compared to personal loan and credit card interest rates, cryptocurrency has much lower rates. While it’s not the cheapest on the market, it could save you quite a bit of money over time.
2. No credit check. Generally, when you apply for a loan, a credit check is done as a precautionary measure. For many with poor credit, this can be a bit of a roadblock to getting approved for a loan. Most crypto lending platforms do not run credit checks, making it easier to get approved if your credit isn’t in great shape.
3. Fast funding. If you need money quickly, crypto lending may be your saving grace. Unlike traditional loans, you can gain access to your funds in as little as a couple of hours/ This is far more expedited than other loan methods.
Downsides
1. Cryptocurrency is unpredictable. One of the riskiest aspects of using crypto assets as collateral is that cryptocurrency is unpredictable. If it were to crash while you’re still working to pay back a loan, you may owe even more than what you did initially. Additionally, the lender can sell some of your assets to cut your loan-to-value ratio.
2. Zero Access to holdings. When your crypto assets are tied up as loan collateral, you have no access to them. While this doesn’t matter to many people, if you did need your assets for whatever reason, you cannot access them if you still have an outstanding balance on a loan.
3. Crypto interest accounts aren’t insured. Unlike the money in your bank account, your cryptocurrency assets are not insured. This means that if an exchange fails or falls through, you would lose everything.
The Bottom Line
Cryptocurrency is quickly rising as a popular form of digital currency. It wouldn’t be surprising if, in the future, most loans are done via crypto assets. Similar to most financial options, crypto lending has upsides as well as downsides. Ultimately, it depends on what your lending needs are on an individual basis and if this method would be advantageous to you.
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