Crypto Lending Use Situations – From Newbie to Pro
Are you new to the cryptocurrency industry? Welcome to the most advancing and ever-growing trade. If you’ve been there for some time, the term crypto might be familiar. Most people know about traditional lending but not this new type. This blog will explain more about the concept and answer some vital questions that surround it. If you are a Singaporean, you might like a deeper understanding of the cryptocurrency business as it has taken a different course of growth.
What Is Crypto Lending?
This is the borrowing of funds (fiat or virtual) using digital assets as security. Borrowers can use their crypto assets as collateral to acquire a stable coin loan, while lenders give the needed funds at interest. It occurs in two ways; peer-to-peer (P2P) and business-to-consumer (B2C) lending services. It also involves either crypto or crypto-fiat.
The Benefits of Crypto Lending in Markets
Essentially, credit and lending increase the amount of useful work money by transferring it from people who don’t have immediate use to those who have. This way, both parties lenders and borrowers increase the utility of money through yielding interests and capital acquisition, respectively.
Lending is a huge opportunity for the crypto business and users, who had only two alternatives as to how to utilize crypto; either trade or hodl. Hodlers would just let their cryptos stay in wallets. But, now they can use those assets to generate results. Investors can also receive fiat
without initiating a taxable sales event and get cryptos for trading, market making, or arbitrage.
Compared to traditional lending, this subsector of DeFi (Decentralized Finance) has numerous advantages like lack of credit check before loan approval and the low-interest rates. The standard loans you can obtain in crypto lending can also be very small, unlike banks, which usually lend only huge amounts of money.
One major marketing concern with this crypto lending is that it doesn’t provide full benefits of true credit as all the loans are still overcollateralized. You must have capital at hand to obtain a loan, something that most borrowers find disappointing. Even so, if you’re in Singapore, that should not worry as lenders like Fortune Credit are ready to assist you at any time.
The Risks of Crypto Lending
Since the cryptocurrency industry is new and unregulated by governments, it can be riskier than centralized financial institutions. Here are some of the dangers that might result from crypto lending:
- Market volatility. The market is 24/7, meaning that there can be high price swings. Borrowers risk providing liquidity in case their collateral value goes below the required to ensure the lenders get their whole share. Thus, they need to be cautious and watch their collateral ratio to ensure it is within a safe range.
- Hackers. The possibility of platforms being hacked is high. This is because the computers system that governs capital is in the form of smart contracts which are hypothetically feasible for a hacker to attack the platform via a bug or exploit.
- Regulation threats. This sector involves tax evasion, and sometimes there could be regulatory risks that may lead to taxation. And, the regulatory future is not yet known as it occurs without a license. This could lead to problems with loan recovery if the authorities happen to put restrictions.
Crypto Lending Platforms
These are platforms that act as brokers between borrowers and lenders. There are several of them that traders can use to carry out their business deals. They have different terms of services and benefits some offer minimal interest rates, others support various cryptocurrencies, and others are safe and secure to work with.
Here’s a list of the most popular crypto lending
- BlockFi.com. It’s a top lending platform in the crypto industry offering a variety of products.
- Nexo.io. It allows you to lock up and give out only stable coins and fiat currency. It also provides a crypto visa in which to load your money for easy spending.
- Crypto.com. It provides a service called “Crypto Earn” that enables you to lock your assets for three separate terms, each with a different interest rate. The longest one is for three months and has the highest interest rate.
- Celsius Network. It allows users to lend and borrow 25 various cryptos, including Tether Gold. It also has some of the highest interest rates favorable for lenders.
- Bank of Hodlers. This is Singapore-based and enables you to withdraw funds at any time. The interest rate relies on the cryptos you have. For borrowers, you can repay the loan at your own time and in any number of installments.
- Binance loans. It’s among the largest exchanges and currently gives credits also. It focuses on short-term loans.
Before you decide on using any of the platforms above or those not listed, it’s appropriate to understand some of the things you should consider. These essential considerations
- Interest rates. Lenders should look for a higher interest rate, while borrowers a higher one.
- Security. The platform’s safety is vital. It should be reputable and have no records of consistent hacks without measures.
- Flexibility in terms. Things like loan repayment periods, penalties for late payment, and frequency are significant factors to consider.
- Available cryptocurrencies. Know which cryptos the platform supports and avails. Most deals in Bitcoins and Ethereum and reliable ones display these on their homepage.
- Geographical limits. Some platforms are global, while others are restricted to specific countries or regions. Check to see if the one you choose is geo appropriate.
Crypto Lending Use Situations From Newbie to Pro
To understand how this DeFi sector works, let’s wind up with the different ways that users can participate in the markets and platforms beginning with the most basic to the most advanced.
- A single platform, single asset lending. It’s the most common and is useful in checking rates across platforms. A tracker like CoinMarketCap’s interest rate tool is used to calculate the best profits for the asset you want to lend.
- Non-taxable dollar-denominated liquidity. This involves using cryptos as collateral to obtain a dollar-pegged loan to increase liquidity to cover expenses. It’s suitable for crypto holders who want to sell their crypto without losing investment exposure or having to pay taxes.
- Rate arbitrage. This entails borrowing an asset from one platform and lending it to another. For instance, taking BTC on Nexo.io for 0.05% rate and giving it out on BlockFi.com for 5.0%, resulting in a 4.95% yearly BTC profit.
- Margin leverage. You can acquire leverage by taking a loan, buying extra collateral, and increasing the loan amount on a loop until you reach the limit. This is a long-term investment that enables you to gain more profit.
- Flash loans. With these, you can borrow up to a full free liquidity amount on a platform, use it to accomplish other operations, and repay at the end of the complete transaction. It is monitored by the database atomicity principle, meaning you require some technical knowledge to perform a flash loan.
- Liquidations. This is for pros; you can act as a liquidator in the DeFi ecosystem. This way, you’ll run bots that recognize loans that have dropped below the collateralization ratio and liquidate the collateral to repay the lender, thereby earning a fee for the service.
DeFi is an ecosystem that’s gaining rapid momentum with its subsector crypto lending promoting this growth. With the passing of time and improvements made to solve market volatility, interest rate variance, and regulation issues, it’s expected that this industry will blossom. Countries that are way ahead like Singapore will be glad to have done so now.