With Blockchain technology growing exponentially, more and more people are putting their money in this field since it’s one of the most exciting innovations of our time. It uses the Blockchain technology that also powers cryptocurrencies- the digital alternative to traditional money (or the euros, the dollars, the yen, the pounds, etc.)
One sector that is also benefiting from this technology is finance, and especially the lending side of the industry. It is as a result of blending lending and cryptocurrency that the crypto-lending practice was born.
In a nutshell, crypto-lending is the process of lending digital assets through crypto exchanges or different lending sites with an interest rate.
For the last few years, crypto lending has massed some significant amount of attention and is now increasingly becoming a mainstream conversation in banking as well as institutional investors.
The Growth of Crypto-assets
Crypto-assets, or as commonly known cryptocurrency, emerged in 2018 by a pseudonymous person named Satoshi Nakamoto, who invented Bitcoin. With the new invention, more cryptocurrencies were created, including Litecoin and Namecoin, with Bitcoin leading the
pack.
By 2017, Bitcoin value had soared to $1,000 and by the end of that year; it was worth a whopping $20,000. However, the value dropped almost by half since then and by the end of 2019, Bitcoin was worth around $10,000.
Figure: How works Crypto Lending (example of CoinLoan)
How Does Crypto Lending Work?
Cryptocurrency lending works just like p2p lending, by connecting borrowers to lenders via an online platform. Instead of money, crypto lending trade on cryptocurrencies via a crypto lending platform.
Lenders on crypto lending receive their assets once the borrower repays the loan. Most of the loans are also backed by physical assets like real estate, while others allow users to take loans backed by intangible assets like cryptocurrencies.
Crypto lending can differ, depending on the platform, but what remains constant is the core concept. A lender makes its assets available to loan at a certain rate.
Users usually lend their cryptocurrencies for two main reasons: first, for personal use and second, for margin lending. With the later, once the lender’s funds are available, a borrower who believes a certain coin will increase in value will request to lend a part of the funds availed by the lender. In a few days’ time, the borrower will then pay back the borrowed cryptocurrencies along with the interest rate.
Crypto-to-Crypto Lending
This type of lending works for individuals who have reserves of cryptocurrencies that they are not intending to use them any time. You can lend Ether, Bitcoin, or Altcoins and start making profits.
Crypto Lending Platforms
The below list comprises the leading platforms that offer cryptocurrency lending services. If you are thinking of trying out this type of lending, these platforms may provide you with the best starting options.
SALT Lending
This platform offers Blockchain-backed loans with Bitcoin, Litecoin, Ethereum, and Dogecoin as collateral. SALT is a short form of (Secured Automated Lending Platform.
Nexo
Nexo is powered by Credissimo and offer a prospect to make quick crypto loans, allowing crypto-asset owners to sue their holdings as collateral, and then access loans in cash form. This way, crypto-asset holders can obtain cash while retaining the ownership of their crypto assets.
How to Invest in Crypto Lending
Choosing the Right Platform
Before we go any further, it is important to inform you that the crypto lending platform is categorized into centralized or decentralized. Whichever category you chose will be influenced by its pros and cons.
Centralized platforms usually allow lenders and borrowers to agree on the essential details of the terms of the loan, but the transfer of loans, as well as its management, is done by the platform. The interest rate normally varies between 1% and 5%.
Decentralized on the other hand eliminates the use of a third party in the handling of the loan.
Investing in Crypto Lending
The first thing to look for as an investor is a collateral offered against the loan. Usually, the collateral should worth more than the value of the loan, normally in the form of a cryptocurrency such as Bitcoin and Ethereum.
Most platforms will enforce a maximum LTV (loan-to-value) ratio of up to 60%, meaning the borrower will receive a loan that is less than 60% of the collateral value they have offered.
Due to their volatility, cryptocurrency collateral may change in value any time, which can lead to loss of investment in the part of the lender.