Since highly publicised platforms like SALT came about, crypto lending has been a topic du jour. Original crypto lending sites charged borrowers a fairly high rate, albeit much lower than credit card companies. However, now that other players like BlockFi, Celsius Network, and Monarch are appearing on the market, it’s becoming an increasingly attractive option. But, is it worth the risk?
Crypto lending can make your money work for you
If you’re one of the fortunate people who invested in the early days, the chances are, you have a nice stash of cryptocurrencies sitting in a hardware wallet. If you’re a die-hard believer in Bitcoin, Ether, or your preferred cryptocurrency, you’re probably HODLing tight to your crypto.
It’s important to keep your cryptocurrency safe and away from hackers. However, you’re not earning any money on your crypto assets if they are simply sitting in a hardware wallet. This is especially true in a bear market when the prices go down.
Moreover, you may need to unlock some of the value of your crypto now to buy a car or pay for reparations on your house, for example. But if you firmly believe that BTC is going to have another bull run, you don’t want to sell any of your stash.
Crypto lending allows you to put your cryptocurrency up as collateral for a fiat loan. You can also do this with a much lower interest than you’d get from a bank. Celsius Network, for example, charges 9% interest on loans backed by crypto. Consider that compared to the 20-25% your credit card company charges.
Moreover, crypto lending sites don’t care about people with a bad credit history or insufficient purchasing history, as long as the crypto collateral is there.
Consider Brock Pierce for a moment. The child-actor-turned-entrepreneur-turned Bitcoin maximalist recently used his BTC as collateral to buy a $1.2 million home in Amsterdam.
Why not just buy it outright? He clearly believes that his crypto assets will be worth a lot more in the long run. Using a crypto lending site, in his case, Swiss provider Nexo, allows him to get the best of both worlds. He gets the fiat for his house and keeps the value of his BTC.
Crypto lending could be risky for several reasons
Crypto lending is not something you should go into blindly. There are always risks involved, especially when it comes to default risk or security risks. Regarding default risk, you should keep in mind that people who are attracted to these sorts of loans may have a bad credit history and are usually deemed a high risk of default.
However, the borrower will put up BTC, ETH, or another cryptocurrency as collateral, as Brock Pierce did. The lending platform usually states that the lender can keep around 80% of the crypto collateral in case of default. But be sure to read the fine print.
Crypto lending is essentially for people who are bullish on the future of cryptocurrencies and understand that they may end up with crypto returns rather than fiat in the case of a default. Lenders understand that the markets are volatile and it may take some time to recover the fiat amount lent out.
If you’re a borrower looking to put your crypto up for a loan, you need to consider the security risks.
You will have to remove your crypto assets from their secured place in your hardware wallet. This means that you must be completely confident in the lending platform’s custodian.
In BlockFi’s case, Gemini is the custodian and for Celsius Network, they use BitGo. These are both extremely well respected in the industry. However, it’s still worth finding out if there is an insurance policy in the event of getting hacked – and up to how much you will be compensated.
Why crypto lending could be worth the risk
Whether you want to convert your crypto to fiat and lend it out or get a cash loan off the back of your crypto, there are plenty of benefits. While lending platforms may give loans to people with bad credit history, they have to put their crypto up for collateral.
Moreover, while credit history may not apply, most companies carry out AML and KYC verification checks on their customers. This at least carries with it some assurance of not dealing with criminals waiting to run off with the cash.
With loan percentages running from 9 to 22% depending on the platform, the good news for the borrower is that they retain the full value of their crypto collateral including its gains and losses.
As for the lender, even in the worst case scenario where the borrower disappears or defaults, they at least have cryptocurrency as compensation – along with the hope that it will be worth even more in the future.