Cryptocurrency lending is an increasingly frequent action. It is possible to deposit cryptocurrency to support a loan transaction in which fiat money or other cryptocurrencies are obtained.
We analyze cryptocurrency loans. We dig into what they are, what is the usual utility of this type of loan, how they work, where they are made, and how are the defining characteristics of these decentralized finance operations.
What is cryptocurrency lending?
Cryptocurrency lending is a growing model for using cryptocurrencies based on decentralized finance.
It is a formula in which those who own cryptocurrencies deposit them in exchange for a certain price. In exchange, they can obtain a loan in fiat money or other cryptocurrencies.
A relatively common formula is using it to obtain funds to intervene in the market with leverage or to obtain liquidity instead of immobilizing the asset.
How do cryptocurrency loans work?
There are different methods. Generally, these operations are carried out through DeFi platforms, using varied formats in configuring the terms and the application of interest.
We should note that not all platforms offer the same models. Usually, it will be possible to apply for these loans from one week to a maximum of six months.
Depending on the type of loan and the term, interest can even be calculated on an hourly basis. As with conventional loans, early repayment will be possible, with the advantage that interest will only be charged on the actual loan term.
The most common loans are made on Bitcoin or Ethereum, although they also reach other types of cryptocurrencies, including stable cryptocurrencies. These also provide the bonus of lower volatility during the loan period.
Platforms offering cryptocurrency loans
More and more players are involved in cryptocurrency Lending, including some of the major exchange platforms such as Binance. That has generated its borrowing environment in Binance Lending.
Some of the most relevant platforms in cryptocurrency lending would be:
Cryptocurrency loans are another option incorporated within decentralized finance. They allow the request of liquidity (or another digital asset) in exchange for depositing one’s cryptocurrency. After payment of interest, the investment is recovered.
Are digital asset loans worthwhile?
The average customer is not used to that type of lending. However, it is becoming more common for users who regularly interact with digital assets.
The main difference with any operation with fiat money is that, in addition to the usual risks, here we must add the risk of impermanent losses. In short, this is the loss of value that an asset may suffer while we carry out a financial operation.
An example will be if we take a loan in Bitcoin. Let’s imagine that this financing is prolonged for 30 days. During this time, the asset increases in value, so if we have to return the equivalent to another asset, the cost will be higher.
Similarly, if we grant a loan to a third party and the value of the asset decreases, we may suffer certain losses.
However, in both cases, the platforms usually offer security tools. They may have an added cost, but they protect the user against market variations.
In short, it is not an easy form of financing. It would be more oriented toward people with knowledge of digital currencies. On the other hand, they are mainly used to operate within the digital asset market, so they do not have the same purpose or functionality as conventional loans.
In any case, it is advisable to study this type of operation thoroughly before making any movement or loan request.