Many cryptocurrency loans work as a form of peer-to-peer lending. The borrower uses their cryptocurrency as collateral to take out a loan, while the lender puts up their own cryptocurrency to serve as a loan and earns some of the interest that the borrower pays.
In this way, cryptocurrency users can be both borrowers and lenders, and either get a loan or earn interest on their cryptocurrency as desired.
While the basic principles remain the same, different platforms work in different ways.
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All fees, rates and platform information is current as of 9 December 2019.
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How does cryptocurrency lending work?
Different platforms work in different ways, but the general principle is that of peer-to-peer lending. Borrowers use their cryptocurrency as collateral to get loans, while lenders deposit cryptocurrency, which is used to fund the loans.
Most platforms screen borrowers and issue the loans themselves, then simply share the profits with the lenders. This creates an experience similar to the way banks offer loans and pay interest to savings account holders.
Others, most notably Ethlend, act as marketplaces where borrowers and lenders can come together and browse each other's offers.
In many cases, a platform will have its own native token, which can be optionally used to get preferable rates, discounts or other bonuses.
One of the most important features of these platforms, and one of the reasons they can offer relatively high earnings for lenders, is the fact that they use cryptocurrency as collateral with a typical LTV ratio of around 50%.
This means that there's plenty of collateral to go around, even in the event of a crypto market drop. If a borrower drops below their agreed LTV ratio, their collateral can be quickly and easily liquidated. As an added bonus, it can almost always be sold incrementally as needed, at fair market rates, without any kind of depreciation beyond the price change.
This helps reduce, and theoretically completely eliminate, the risk of default from borrowers. It's essentially just using one type of money as collateral for a loan of a smaller amount of another type of money. This safety means that these types of platforms don't necessarily have to spend as much time and money conducting credit checks, screening borrowers, hiring debt collectors, chasing defaulted loans, setting up payment plans and doing all the other things lenders have to do.
In fact, it can even be used as a framework for completely automating the entire lending process, which some platforms are doing, to reduce costs even further.
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Spotting a scam: Are these rates too good to be true?
One of the best ways to spot a cryptocurrency scam is to be wary of any offer that seems too good to be true.
But do any of the offers on this page qualify? To stay safe and avoid scams, it's important to consider what "too good to be true" looks like in this context.
Cryptocurrency as collateral
As previously mentioned, cryptocurrency is an extremely effective type of collateral for loans because it's essentially a type of money in its own right, and these platforms will typically offer LTV ratios of only 30% to 70%.
This means that, when a system is properly set up and managed, there's practically zero risk for lenders.
This lack of risk would typically translate into extremely good rates for borrowers, but as you can see, that hasn't happened here. Instead, it's turning into higher returns for lenders.
When considering this, it's reasonable to relax one's assumptions of what a good rate looks like.
How much is a good rate?
Another reason these rates may seem too good to be true is because we're comparing them to typical savings account rates of today, which have dropped sharply in recent years. But in the 80s and 90s, it was normal for bank customers to earn interest in the double digits from fixed term deposits.
To an extent, these interest earnings aren't especially high. It's just that the typical rates of today are so low.
A promise to double your money every year is too good to be true, but there's nothing inherently unrealistic about 10% per annum in simple interest.
Are these offers as good as they seem? In many cases, the rates for lenders that are shown on this page are only the maximum possible rates, and getting them may require using platform tokens, or meeting certain thresholds.
If you look at the fine print, you may realise that many of these platforms aren't as good as they first appear. For example, the Crypto.com offer of up to 18% per year is paid as simple, not compound, interest and requires users to stake a certain amount of the native platform token.
Pros and cons of cryptocurrency lending
Both borrowers and lenders have different pros and cons to watch out for when using these platforms.
- Use cryptocurrency as collateral. Most banks and lenders don't let you use cryptocurrency as collateral, but these platforms do.
- Few strings attached. Loans are typically "no questions asked". You don't need to explain why you need the money, and there are typically no conditions on what you can use it for.
- No credit checks. Many of these platforms look at your collateral as evidence of your creditworthiness, rather than checking through more traditional avenues.
- Fast access to funds. While approval times vary between platforms, the lack of red tape means it can be quicker to access loans through these platforms than traditional avenues.
- Requires cryptocurrency as collateral. You typically need to have cryptocurrency to use as collateral when borrowing from these platforms.
- Volatility risk. Market volatility could lead borrowers to unexpectedly need to top up their collateral, or face partial liquidation.
- Poor rates. Cryptocurrency loans tend to have very poor rates considering how little risk there is for lenders.
- Custody and scam risk. You typically have to entrust funds to a platform. If you don't feel comfortable with this, you may be able to find some which operate as a trustless smart contract instead.
- Earn cryptocurrency. These platforms offer a way of earning interest on cryptocurrency (or fiat currency, or stablecoin) holdings.
- High earnings. The poor rates for borrowers translates into high earnings for lenders.
- Minimal counterparty risk. Cryptocurrency's unique features allow for loans with minimal counterparty risk.
- Lack of regulation. Cryptocurrency regulation is still in its infancy, and many of these platforms are beyond the scope of current regulation. If something goes wrong, you may be left with no recourse.
- Custodial platforms. While there are platforms that let users retain control of their private keys while earning interest, similar to staking cryptocurrency, many will require users to make deposits and entrust funds to the platform. If something goes wrong, you may not be able to recover your funds.
- Scam risk. Not all purported cryptocurrency lending platforms are legitimate. Some are scams, and if you accidentally send money to one, you may lose your funds.
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