For crypto owners who’ve been saving up their coins to make a big purchase like buying a new car or building an extension on their house, there may be another option available to them – borrow the money instead of selling their crypto. Crypto exchange platforms are now offering their customers loans backed by their crypto. That means you don’t have to sell your digital assets and lose out on any future gains. A loan allows you to benefit from your profits without parting with your valuable cryptocurrencies at all. How do crypto loans work? And how can you get one?
What are crypto-backed loans?
Crypto loans are very similar to bank loans or even a mortgage. Except, there is no credit check involved. The crypto exchange will ask you how much fiat currency you want to borrow. The exchange then lets you know how much crypto you need to put up as collateral for that loan. Then, as with a bank loan, use that money however you want over a set amount of time before paying it back. If you believe crypto’s value will rise in the future, this is a way for you to get spending money without dipping into your holdings.
How does it work?
Crypto loans work in much the same way as traditional loans. But instead of putting up your car or house as collateral, you put up crypto assets as collateral. To receive a crypto-backed loan, a borrower must possess two things: 1) crypto assets to use as collateral and 2) an account with a crypto exchange that offers crypto loans. Some exchanges even allow users to loan crypto to each other.
You can borrow as much as $1,000,000 on some exchanges. However, the amount you get depends on your crypto holdings. You’ll need to put up an equivalent amount in crypto assets as collateral. Exchanges offer as much as 40% or 50% of your holdings in suitable cryptocurrencies. You also need to check which cryptocurrencies the exchange accepts as collateral. Most will accept Bitcoin, or perhaps Ether, but they might not give you a loan against Shiba Inu or Dogecoin – although you can buy movie tickets with them.
Where can I get one?
There are many crypto exchanges, and it feels like new ones come out every day. Not all of them offer loans. Coinbase and other crypto exchanges provide lending services, allowing you to take out loans backed by your crypto assets. Poloniex takes things further, allowing users to loan their crypto out to other customers. Some people have even taken out loans using NFTs as collateral.
Interest rates for crypto-backed loans
Like with any bank loan, you want to make sure you’re getting a manageable interest rate. Always look closely at what interest rate you’re receiving and make sure it’s comparable to what others offer, including standard banks. More importantly, make sure you can afford the interest amount you are taking on. And never take out a loan longer than you need it; if your investments do well and you’re able to pay off your debt early, that’s great news! However, the critical thing to keep in mind is you don’t want to put yourself in a financial hole. As mentioned above, if you’re looking to loan your crypto out, check how much the exchange will take from your payments. Poloniex, for example, charges a 15% fee of the interest you’re earning.
The risks
It’s easy to make new loans when you own cryptocurrency. But while it might seem like an easy way to instantly grow your crypto stash, there are plenty of risks involved. One downside is that if you don’t pay back your loan, not only do you lose any profit from trading that cryptocurrency, but lenders can also demand access to all of your other assets as collateral. A key caveat to keep in mind is that the amount of collateral you need to put up might change. Crypto prices are known for their wild fluctuations. The price you take the loan out at may change. If it changes enough, the exchange you took the loan out on may ask you to put up more crypto as collateral.
