How do crypto loans work?
Crypto credits (or crypto loans) make it possible to deposit assets available as cryptocurrencies as collateral for a normal line of credit. The general procedure is always the same:
- Deposit cryptocurrency as security (collateral)
- The available credit line in part of the equivalent of the collateral
- Pay out the desired credit within the credit limit in euros (on the account) or a stable coin (on the wallet).
As a rule, the security is at least 150% of the available credit line.
While the loan is open, as with normal loans, interest is due. Depending on the provider, there are fixed or flexible terms. The loan that has been used can be repaid at any time. In this case, the borrower receives all cryptocurrencies back.
If the credit used runs the risk of increasing in value higher than the equivalent of the deposited cryptocurrencies (if the price falls), they will be forcibly liquidated. So they have to be sold to pay off the loan. Any excess from the sale goes back to the borrower.
Why are crypto loans needed?
At first glance, such crypto-backed loans may seem strange.
Why should I deposit bitcoins worth 15,000 euros as security so that I get 10,000 euros?
The answer is: Because I don’t want to sell! With crypto loans you have the opportunity to get cash without selling cryptocurrencies.
The reasons for this can be varied:
- I have a financial bottleneck (broken car), but I don’t want to sell my crypto reserves
- I want to buy more cryptocurrencies with the loan.
- I want to “cash out” price gains, but not generate a tax incident because less than a year has passed since the purchase.
Currently, the second case is probably the most common of these reasons, but collateralized credits and loans are common in the current financial system. For example, in the case of mortgage lending, the property is deposited as security for the loan.
What are the advantages of crypto loans?
Loans with crypto currencies as security have some advantages over normal loans from the house bank.
They are available as an instant loan within minutes.Since
crypto loans neither require CRISIL information nor any other proof of creditworthiness (e.g. pay slip), the processing is very fast and does not take much longer than the duration of the crypto transaction and, depending on the provider, the Verification via webcam. The money is immediately in the account by means of a quick transfer.
Without CRISIL information,
it does not matter who wants to take the loan, just that the necessary security is available.
Flexible loan terms
As a rule, it does not matter whether the loan is required for 3 days or 3 years. The conditions are the same. The loan interest is calculated daily and the loan can be repaid at any time. Or not. As long as the credit line does not exceed the security deposit and has to be liquidated, you are completely flexible. There is no early repayment penalty and you can only repay part of the loan at any time. Without paperwork.
Available to everyone worldwide.
Centralized providers such as nexo.io have areas in which they are not available. But decentralized platforms like Maker DAO can be used by anyone and anywhere.
Different types of crypto loans
The main difference in borrowing is who is running the platform.
With centralized providers (e.g. nexo.io, BlockFi), the loans are granted by the provider himself. The advantage is the very user-friendly process and the fact that the loan can be paid directly into the account in euros. There are also extra products such as a credit card or an app.
The largest providers are:
There is no central point on so-called DeFi lending platforms . The process is a bit more complicated and the credits are paid out as stable coins (for example. DAI, see MakerDAO ). The system is controlled by means of smart contracts. The interest rates are set by the community through a vote. The advantage of this system is that anyone can participate without verification. The disadvantage is that, due to the complexity, it is more for users who are already familiar with cryptocurrencies like Ethereum. In the case of decentralized loans, you don’t get a transfer to the euro bank account, but only a stablecoin, which you have to exchange for euros.
The largest DeFi loan platforms are:
- Maker DAO
Loans with cryptocurrencies as security — the most important thing
- There are various ways to take out loans that are secured with cryptocurrencies.
- To do this, you deposit Bitcoin, for example, and receive up to 75% of the equivalent as a credit line.
- The easiest way to take out a crypto loan is with the provider Nexo.io.
- The money is in the account within minutes. There are no CRISIL inquiries or other verification.
- In addition, there are also a number of DeFi products that also enable crypto loans.
The information contained herein is for informational purposes only. Nothing herein shall be construed to be financial, legal, or tax advice. The content of this article is solely the opinions of the writer who is not a licensed financial advisor or registered investment advisor. Trading cryptocurrencies/commodities/foreign exchange/equity market poses a considerable risk of loss. The speaker does not guarantee any particular outcome.