24 Aug 2021 Simon Briggs
Are Crypto Loans A Good Idea?
If you’re reading this post, you’ve probably taken a loan or met someone who has when short on cash, right? It would be either a bank or a company lending this money, which then needs to be repaid with some interest on top. And this interest is how the bank or lending institutions make money. But what if you were the one receiving this interest instead? That’s right, there are contemporary financial solutions out there that let you lend loans with your crypto and earn interest from it. And this form of lending is called Crypto Lending.
Over the past few years, crypto loans have continued to see unprecedented growth due to attractive interest rates relative to typical loans. But the biggest question is; Are crypto loans legit and safe?
In this article, we are going to drill deep into crypto loans to see how they work, their advantages, and ultimately try to answer whether they’re safe and legit. But if you’re looking to begin your crypto lending adventure, here’s a complete list of the best BTC loan sites.
What Are Crypto Loans?
Put simply, Crypto loans are collateralized loans issued to a borrower by a lender in exchange for their crypto assets as collateral. This means that the borrower gets actual fiat money from the lenders in lieu of their crypto assets such as Bitcoin (BTC), Ether (ETH), or Litecoin (LTC), which can be seized in the absence of repayment.
Just like traditional loans, the process of lending Crypto loans begins with both parties agreeing to a specific interest rate on the loan, after which the loan amount is deposited in the borrower’s bank account. The borrower, on the other hand, pays EMIs to the lender, and once the loan plus the interest are paid in full, the collateral is released to them.
According to a 2021 report published by Global Market Insights, the crypto lending market is projected to explode post-pandemic, as the industry has largely been resilient to the ongoing global economic disruption. Still, many crypto holders are now realizing the massive potential of their holdings in terms of being a brilliant source of collateral. As of 2021, the total market value of funds revolving around DeFi lending crossed the $50 billion mark and it is expected to more than double by 2027.
The Legitimacy and Safety of Crypto Loans
Before we drill deep into the safety and legitimacy of Crypto loans, let’s first talk about the transformative underlying technology behind cryptocurrencies. Basically, many (if not all) cryptocurrencies operate on blockchain technology, which is a unique way to securely record and transfer information.
Think of blockchain as a digital-form records book or a distributed ledger, which keeps records of all transactions conducted across multiple computers, which are also known as “nodes.” This means that every user on the blockchain is a node, although it takes massive computer processing power to operate. The individual nodes within the blockchain verify, approve, and store data within the ledger, which is completely different from the traditional record-keeping methods, where data is stored in a centralized location or a computer server.
A blockchain organizes all the information inputted to the ledger into blocks, and each block has a storage limit, meaning that new blocks are continually being added to the ledger, forming a long chain. Still, each block has a unique identifier, which not only helps protect the information recorded within the block from users without the required code but also comes in handy on protecting the block’s place within the chain by clearly identifying the block that preceded it.
Once information is keyed in the blockchain and encrypted with the unique identifier, it is unchangeable and permanent. Better yet, each node records the full timeline of data within the blockchain, all the way from the initial input to the last input. As such, if someone tampered with one node and manipulated the data for personal gain, the information in all the other nodes remains intact, meaning the altered record can be easily isolated and rectified because it doesn’t match the majority.
So, to answer the question as to whether crypto loans are legit and safe, the simple answer is yes. The way the system works makes it almost impossible for an individual to replicate the computing power needed to reverse engineer the entire blockchain, and it’s even harder to figure out all the hashes or unique identifiers.
Along with that, most DeFi platforms carry out anti-money laundering and KYC verification checks on their users, so you can be sure that you aren’t dealing with criminals waiting to take off with the cash. Still, Crypto loans are governed by well-audited and public smart contracts, which automatically okay the transactions if the borrower meets certain predetermined conditions.
Besides that, there is transparency throughout the process and fund movements can be traced, all thanks to the underpinned Blockchain technology.
Advantages of Crypto Loans
One of the major reasons why cryptocurrencies holders invest in them is to meet some futuristic goal. Ideally storing these assets in a wallet would make sense, but it isn’t a very productive way of using them considering their market supply constraints. So instead of selling them off and missing out on the future gains, a good idea would be to use them as collateral to get crypto loans, which can then be used for personal benefits.
Research has shown that the crypto loans interest rate is relatively high compared to that of fiat currencies. This difference in interest rate not only provides passive income for the lenders but presents a financial opportunity for the borrowers, who like to short sell assets and benefit by margin trading.
Crypto loans also allow both lenders and borrowers to engage in arbitrage trading. Arbitrage trading can be conducted by users between a Centralized Exchange and Decentralized Exchange by borrowing dollars at a lower DEX rate, trading them on a CEX for crypto coins. and lending them on the DEX to earn a good arbitrage fee.
Unlike in the contemporary banking world where you need to have a good credit history to get a loan, crypto loans don’t care about your credit history or purchasing history, as long as the crypto collateral is available.
Cons of Crypto Loans
Just like mainstream banking loans, crypto loans do also come with a few drawbacks. They include;
- As we all know, cryptocurrencies are super-volatile, meaning lenders can potentially lose more than they earn. As a solution for this, however, you can invest in stable coins, which are cryptocurrencies designed to retain their value just like real-world assets.
- Another major concern for crypto lending is security, especially with the increasing cases of crypto theft.
Final Thoughts
As you can see, crypto loans are 100% legit and safe. Along with being fantastic collaterals, cryptocurrencies are easily liquidated and saleable, making them ideal for borrowers and lenders looking to avoid the bureaucracies that come with mainstream banking lending. And if the unprecedented growth rate that the industry has seen in the recent past is anything to go by, crypto loans will continue being an integral part of our society.
Of course, we can’t overlook the fact that there are prying scammers out there looking to steal your money using cryptocurrency. For this reason, it is important to conduct due diligence, and most importantly ensure that you have a smart contract that can still return your crypto assets in case the borrower is unable to pay you back.
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