How Do Cryptocurrency Loans Work?
With the increasing popularity of cryptocurrencies such as Bitcoin, Ethereum & Co., the interest of banks in being able to offer their customers more blockchain-based financial products in the future is also growing. In addition to smart contracts in the area of insurance and construction financing, crypto loans or blockchain loans are particularly in demand. These make it possible to place one’s cryptos in “custody” in order to receive FIAT money for them via crypto instant credit lines. The advantage is that owners do not have to sell their crypto assets.
How do crypto loans with Bitcoin & Co. work?
The principle is actually quite simple. Anyone who owns Bitcoins or other crypto assets such as Ethereum, Litecoin, etc. and wants to exchange them for fiat money without having to sell their cryptos to do so can do so with the help of a crypto loan. The “borrower” is approved a set credit limit based on the number of cryptos (Bitcoin, etc.) deposited. Means that assets available as cryptocurrencies are deposited as collateral for the loan. The money is then in the account within a few minutes. Read more in our article about bitcoin lending.
No credit check or other verification
Another advantage with crypto loans is the approval. Unlike conventional bank loans, where specifications such as a fixed income and the credit core are checked, a crypto loan is available immediately. The cryptocurrency asset serves as collateral for the loan. Of course, not 100% of the value of the deposited cryptocurrency (e.g. Bitcoin) is paid out as a credit line, but a security deposit is retained by the bank. This differs from bank to bank.
Example:
You own several Bitcoins with a current exchange rate of about $22,000 (as of December 18, 2020) per Bitcoin. Now you need cash and therefore want to exchange some of your Bitcoins for fiat money, but without having to sell your BTC. Now you can deposit, for example, 1 Bitcoin as collateral and make use of the crypto instant credit line. If the provider’s collateral deposit is 50%, for example (e.g. with the well-known provider nexo), you will therefore have $11.000 at your disposal immediately.
- 1 Bitcoin (BTC) = $22,000
- Security deposit (max. 50% available as credit line).
- Crypto instant credit line: $11.000
As with normal loans, interest also accrues on the crypto loan. These are based on the term of the loan and also differ depending on the provider. Basically, you can expect an APR between 7-12%.
What happens if the price of the deposited cryptos falls?
If the credit used runs the risk of becoming higher than the equivalent value of the deposited cryptocurrencies (e.g. if the price falls), they will be forcibly liquidated. The crypto assets must then be sold to pay off the loan. Any surplus from the sale of the cryptos then goes back to the borrower.
Who can get a crypto loan?
Crypto loans can be used by anyone who has crypto assets. However, the acceptance of cryptocurrencies differs from bank to bank. While some banks only accept the “big” cryptos such as Bitcoin (BTC), Ethereum (ETH) or Ripple (XRP), others accept almost all altcoins. Crypto credits are of particular interest to “hodlers”. Hodl is a term used in the cryptocurrency community to hold cryptocurrency rather than sell it. A person who does this is referred to as a “Hodler”. These people hope for further appreciation of their coins and therefore do not want to sell them. Hodlers can then “invest” their crypto assets in crypto loans to receive money.
Who is issuing crypto loans?
Banks are currently expanding their portfolio around crypto loans. However, independent of banks, a separate ecosystem is increasingly developing thanks to the blockchain, which is referred to as DeFi (Decentralized Finance). As a result, there are now several FinTechs to which Bitcoins and other cryptocurrencies can be lent. Such loans can be to the rescue of small businesses at the moment. Read more on Goodbyebanks.
Conclusion
Instant crypto loans are popularly used as a short-term cash injection without losing the valuable crypto assets. FinTech Nexo.io, a licensed and regulated financial institution which is considered among the leaders in crypto lending, reports more than $1 billion in requests for crypto instant loans. The trend continues to rise.
