When Bitcoin first appeared in 2009, it was a mysterious and complex currency that few understood. A decade and thousands of altcoins later, the hype surrounding cryptocurrency only seems to be growing. Although not all digital currencies are valuable enough to hold, the few that are stable have introduced new opportunities that make it easier for owners to reap immediate benefits.
One such opportunity is the ability to receive a loan against the crypto you hold. Other than waiting speculatively for the value to rise, you can gain from your investment while still retaining ownership of your digital coins.
How cryptocurrency lending works
Crypto loans work in a straightforward way; you become eligible for a loan based on how much you have in your crypto wallet. This is commonly referred to as a loan to value (LTV) ratio. What it means is that the amount a lender will allow you to apply for will be a percentage of the value of the coins in your wallet.
For example, if you have bitcoins worth $100,000 and your lender allows an LTV of 50%, that means you qualify for up to $50,000. This is a better way of valuation than with fiat based loans, where the requirements are more stringent. Blockchain plays an important role in this process because it assures the lender that your crypto is genuine and valuable enough to hold as collateral.
Due to the volatile nature of cryptocurrency, lenders might impose additional requirements to shield themselves from losses. If you take a loan against your crypto at a fixed LTV ratio, then the worth of your wallet registers a drastic reduction due to the falling value of the digital currencies in it, your lender might require you to increase the number of coins in your wallet as a way of boosting your collateral.
Advantages of crypto loans
Cryptocurrency loans extend further the already amazing benefits of bitcoin and other digital currencies. Some of the most visible advantages of loans are:
With these loans, you get to receive a part of the total value of your crypto wallet in form of fiat currency while still owning your coins. This is arguably the most innovative and beneficial aspect of crypto loans. Before such lenders came along, you had to sell your digital currency in order to spend the money earned.
If you still want to hold your crypto for speculative purposes but also want to benefit from it right now, applying for a cryptocurrency loan is a very good way of killing those two birds with one stone.
Blockchain technology has made it possible to secure digital transactions in a way that wasn’t possible before. This has led to increased trust in cryptocurrency and ultimately, in associated services such as crypto loans.
Compared to fiat based loans, cryptocurrency lending is more affordable.`Most lenders only charge you a fixed Annual Percentage Rate (APR) that is way lower than the fees charged by traditional banks.
With cryptocurrency loans, you’re given more options by your lender. The amount you apply for depends only on how much digital currency you are willing to put up as collateral. The repayment period is also flexible, so you won’t have lenders harassing you to repay.
So long as your lender allows it, you can apply for a loan from anywhere in the world and be subject to the same lending terms as any other applicant.
5. Greater control for borrowers
The decentralized nature of cryptocurrencies extends to lending, by making the process more democratic. You’re not subjected to the tedious bureaucratic process that is the hallmark of fiat based loan applications. Third parties are also eliminated, leaving you and the lender as the only participants.
This makes the application process faster, as well as more affordable due to the elimination of various parties and the fees they might have charged.
These are just some of the benefits of applying for cryptocurrency loans. Others that you might enjoy in the long term include peace of mind and financial stability.
Features of a good cryptocurrency lender
Due to the nascent nature of cryptocurrency lending, you might be unable to get sufficient information regarding lenders. The decentralized nature of cryptocurrency also means regulation is not as strong as with traditional lenders. A reliable crypto lender has the following general characteristics:
With such lenders, what you see is what you get as far as the lending terms are concerned. You’re informed beforehand of all the necessary charges, such that you won’t find out about hidden fees in the course of servicing your loan. The contract your crypto lender offers you should be straightforward, without any unnecessary jargon designed to confuse you.
- Focused on security
It goes without saying that security has become a major concern in cyberspace. Even major banks that can afford to spend millions of dollars on cybersecurity solutions are still getting hacked, so is there any hope for fledgling crypto lenders? This is where a combination of decentralization and blockchain play a role in improving security for potential lenders.
A lender that puts integrity first also has a KYC process that collects only the most important information about its customers. This prevents the existence of large data banks containing complex customer data that can easily be stolen in hacking attempts. Cryptocurrency lenders try their best to keep you as anonymous as possible.
- Great customer care
This is another feature that is required of any business, not just crypto lenders. A company that listens to customer complaints and implements its suggestions is more likely to offer superior services.
Treating existing customers right also acts as a powerful marketing and recruiting method, because satisfied customers give the business free advertisement via word of mouth and online reviews.
- Adapts to changes in technology
Technology evolves at a dizzying pace with each passing year. As computing gets cheaper and information becomes easier to access, innovators will keep coming up with new ideas to solve 21st-century challenges.
A reliable crypto lender not only understands this but is also fully prepared to implement necessary technological changes to their business model.
Getting a loan from a lender who has all these features means you stand a good chance of reaping maximum benefits from your cryptocurrency.
Cryptocurrency lending is not just a passing fad. With the continued growth of digital currencies, financial services associated with them will also grow. If you own bitcoin or altcoins and plan on holding on to them for a long time, you can still benefit by using them as collateral for a cryptocurrency loan.
That way, you still own your cryptocurrency while reaping the benefits offered by fiat currency.