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Cryptocurrency loans are a way of putting otherwise dormant funds to work, without having to sell any. Alternatively, borrowers can get access to more cryptocurrency, similar to how they would use cash a loan from a bank. Unlike a bank loan, cryptocurrency loans often exist as a form of peer-to-peer lending through an intermediary platform. 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.
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 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.
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.
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.
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.
And are these offers really as good as they seem? In some cases, the rates for lenders that are shown on this page may be the upper end of what's possible, and conditions may apply in order to get those rates.
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, a platform that offers up to 18% per year will likely only pay that as simple interest, not compound, while requiring users to stake a certain amount of the native platform token.
Both borrowers and lenders have different pros and cons to watch out for when using these platforms.
Some of the risks to be aware of when using cryptocurrency lending platforms, as either a lender or a borrower, include:
The nature of these risks means there's a chance of losing all the funds you commit to a platform, no matter how reputable and reliable. It's important to be aware of this, and to avoid over-committing.
An in-depth review of one of the most popular lending and interest earning platforms in cryptocurrency.
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