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- 1 Deposits in cryptocurrency lending earn significant interest rates.
- 2 Through collateralized loans, crypto loans provide access to cash or cryptocurrency.
- 3 Margin calls may occur if asset prices fall, making crypto loans hazardous.
Cryptocurrency gained popularity in the past year, drawing numerous investors. Yet, these digital assets are highly volatile. Bitcoin, for instance, doubled in value in H1 2021 but later dropped significantly.
For those wanting to keep their crypto investments and use traditional currencies like INR, USD, CAD, EUR, etc., crypto lending offers an option. Investors can securely store their crypto assets in a wallet, waiting for their value to increase. Crypto lending and borrowing are becoming more popular, marking a new era in finance.
Let’s explore this crypto-based financing further.
What Is Cryptocurrency Lending or Borrowing?
Cryptocurrency lending or borrowing, also known as crypto lending, is a financial practice that involves individuals or entities lending their cryptocurrency assets to others in exchange for interest payments or collateral.
Borrowers typically use these funds for various purposes, such as trading, investing, or accessing liquidity without selling their crypto holdings.
On the other hand, lenders earn interest on the cryptocurrency they lend out.
This practice is facilitated by cryptocurrency lending platforms or decentralized finance (DeFi) protocols, which connect lenders with borrowers and manage the lending process, including interest rates and collateral requirements.
It allows crypto holders to put their assets to work and generate passive income while providing borrowers access to crypto capital.
Illustration to Understand Crypto-Lending
Suppose you have 10 Bitcoins and want to earn passive income. You can deposit these Bitcoins into a crypto lending platform and receive regular interest payments. The interest rates typically range from 3% to 7%, which can be even higher for stable assets like stablecoins.
One unique aspect of crypto lending is that borrowers must attach their cryptocurrency as collateral. This means that in non-repayment, the lender can sell the collateralized cryptocurrency to cover the loss, reducing the risk for investors.
How Does Crypto Lending Work?
Crypto lending involves three parties: lenders, borrowers, and lending platforms. Lenders want to earn passive income from their crypto holdings, borrowers need funds, and lending platforms facilitate the transactions.
Here’s a simplified process:
- Borrowers request a crypto loan from the lending platform.
- Borrowers offer their crypto assets as collateral for the loan. The platform accepts the collateral and attaches it to the loan.
- Lenders fund the loan through the platform, providing the borrowers with the requested funds.
Types of Crypto-Lending Platforms
There are two main types of crypto lending platforms:
Automated Platforms
These platforms provide dividends when you deposit assets into your crypto wallet. It’s a straightforward way to earn interest without actively managing your investments.
Manual Platforms
With manual platforms, investors must manually stake a certain amount of their crypto assets for a specific period to generate dividends. This approach requires more active involvement.
Conclusion
Crypto lending and borrowing provide opportunities for crypto investors to generate passive income by lending their assets or obtaining loans while using their crypto holdings as collateral.
These transactions are facilitated through third-party lending platforms, making the process accessible and secure for participants.
Nancy J. Allen is a crypto enthusiast, with a major in macroeconomics and minor in business statistics. She believes that cryptocurrencies inspire people to be their own banks, and step aside from traditional monetary exchange systems. She is also intrigued by blockchain technology and its functioning. She frequently researches, and posts content on the top altcoins, their theoretical working principles and technical price predictions.
