Cryptocurrencies have gained a lot of mainstream adoption in the past few years. The industry is expected to grow from $1.6 billion in 2021 to $2.2 billion in the next five years (2026). It offers excellent investment opportunities with high rewards. Crypto lending is one of the emerging trends with great potential to earn returns.
Let’s find out how you can make your crypto work for you in the cryptocurrency lending sector.
What is crypto lending?
If you do not want to sell your crypto assets and still wish to earn gains, crypto lending can help you.
Crypto lending is a process allowing investors to lend their cryptos to borrowers. In return, lenders earn crypto dividends. Lenders retain ownership of their assets and can hold them to add more value using crypto lending platforms.
Crypto lending platforms usually work for both crypto and stable coins. Lenders can earn interests ranging between 4% to 17% yearly ROI. It is an effective way to earn passive income.
Crypto-backed loans use cryptocurrency as collateral. On a borrower’s end, anyone can borrow loans in cash or cryptocurrency by offering their crypto holdings as collateral. They remain the owner of their assets but cannot use the collateralized crypto for making any transaction until the end of the lending period.
How does crypto lending work?
Crypto lending involves lenders, borrowers, and a lending platform. It works in the following steps.
- The borrower requests a crypto loan from a crypto lending platform.
- He offers collateral (crypto assets) for the loan. Once the request for a loan is accepted, the platform attaches the collateral.
- The lender transfers the loan amount to the borrower through a lending platform.
- The borrower has to pay back the entire loan amount for taking back his stakes in collateral.
Let’s consider two examples to see how crypto lending works for lenders and borrowers.
Suppose Benjamin owns 5 Bitcoins, and he wants to earn a passive income with his Bitcoin investment. He deposits these Bitcoins in his crypto lending platform wallet to gain interest from it. The interest rate on lending Bitcoins ranges between 3% to 7%. It can be as high as 17% for stable coins such as Binance USD, etc. Based on his investment, he is earning interest weekly or monthly without selling his cryptos.
Investors can also borrow fiat currency (such as USD, EUR) from crypto lending platforms without selling their assets in case of any emergency.
Suppose James owns a Bitcoin worth USD 20,000, and he needs a loan of USD 10,000 against it at an interest rate of 6% annually. William has USD 10,000 stable coins, and he is willing to lend it to James at an interest rate of 6%, keeping his 1 Bitcoin as collateral. When James pays back William’s USD 10,000 + 6% interest, William will release that Bitcoin back to James.
What if one fails to pay back the loan?
If the borrower fails to pay back the loan, the lender can liquidate (sell) the collateral and refund the balance amount.
Crypto lending platforms usually help to recover most of the losses, securing an investor.
Benefits of crypto lending
Crypto lending offers unique benefits as compared to the traditional financial sector. The following are the benefits of crypto lending.
- The interest rate on crypto loans is below 10 percent, less than on credits card and personal loans.
- Borrowers have the option to choose loan currency. They can get the loan amount in US dollars or can also select cryptocurrencies.
- Crypto lending is more accessible. Anyone can get a crypto loan even with a poor or no credit history.
- Crypto loans are faster. A borrower can get the loan amount within few hours after approval.
Drawbacks of crypto lending
Crypto lending has some drawbacks as well, which are as follows.
- Some lending platforms have minimum borrowing requirements which can be high. You must have enough holdings to secure a loan. Otherwise, the loan will not be approved.
- The time for paying back the loans is short, 12 months or less. You do not have a lot of time, and during it, if you fail to pay back, the platform will liquidate your collateral.
Popular crypto lending platforms
The following are a few of the most popular crypto lending platforms out there.
The bottom line
Crypto lending offers a great opportunity to earn interest on cryptocurrencies without selling them. Crypto loans are fast, inexpensive, and accessible. However, you need to understand both the pros and cons of crypto lending. Do your own research before making any decision.