The erratic price changes of Bitcoin (BTC) and other digital currencies are undeniably fascinating, especially for crypto enthusiasts and speculative investors. Besides using cryptos to make more efficient payment transactions, many people also engage in Bitcoin trading to make some cash. But whether you’re looking for ways to make your cryptos work for you without selling them or want to get your hands on cryptos without actually buying them, crypto lending might be the solution for you.
Crypto loans in a nutshell
First things first—what are crypto loans and how do they work? Bitcoin loans are pretty much like any other loan where you can borrow specific amounts from a lender and pay them at certain interest rates. The only difference is that in this type of loan, cryptocurrencies serve as your collateral or the item or asset used to secure the loan.
You’re probably aware of how much Bitcoin is worth today, but just in case you aren’t, the price of Bitcoin has reached over 54,000 USD at the time of writing. The rapidly changing value of Bitcoin is the clear reason why it isn’t easy to just borrow Bitcoin from someone you know. In cases like this, the lender and borrower need reassurance that the requirements from both parties can and will be met.
So if you want to either borrow or lend crypto securely and reliably, exploring crypto or Bitcoin lending platforms might be the most appropriate solution for you.
Getting started with Bitcoin loans
After understanding how crypto loans work, let’s now look into the essential things you need to familiarize yourself with before applying for a Bitcoin loan.
Crypto lending platforms
These platforms are set up to act as a safe place where Bitcoin lenders and borrowers can set up and complete transactions in a secure and efficient way. Bitcoin lending platforms have two types: centralized and decentralized. Some platforms allow you to open a savings account, take out loans, and even trade cryptos.
- 🔐 Centralized Finance (CeFi) Crypto Lending – This type of platform is run and maintained by a company or group. Simply put, it has a central authority that manages and controls all of its systems and operations. Centralized platforms often require users to create an account and go through security compliance procedures like know your customer (KYC) to prevent money laundering activities and related financial crimes from taking place. This regulated platform keeps track of all transactions using blockchain technology and often has 24/7 customer support service available for all users.
- 🔏 Decentralized Finance (DeFi) Crypto Lending – This type of Bitcoin lending platform operates without any central authority. Instead of being monitored and secured by people, decentralized Bitcoin lending platforms are handled by codes. They often use smart contracts to automate payouts and transactions. Since it runs on the blockchain, all transactions taking place can be viewed by everyone in the network, which paves the way for more transparency. When you borrow Bitcoin from decentralized crypto lending platforms, all you need to do is apply for a loan and send the digital currency that will serve as the collateral. That means you don’t need to provide personal information or worry about your credit score or other required documents.
Both offer unique, strong points but be sure to pick one that is more accessible, practical, and easier for you to use.
Cryptocurrencies for collateral
The digital currencies you can use as collateral vary depending on the crypto lending platform you choose. But to give you an idea, most crypto lending platforms today allow you to borrow coins like Tether (USDT), Bitcoin Cash (BCH), Cardano (ADA), Monero (XMR), Litecoin (LTC), Tron (TRX), Ripple (XRP, Ethereum (ETH), Bitcoin (BTC), Dogecoin (DOGE), Stellar (XLM), and more. You can also use them as collateral for a loan. It’s up for you to decide which ones are your top picks!
Like borrowing money from banks and other financial institutions, Bitcoin loans also come with lending rates or the cost of borrowing money or assets. Often, interest rates vary on the terms of the loan, the amount, and the crypto lending platform. So make sure to check how much interest you’ll be paying for the amount you’re planning to borrow. Some Bitcoin lending platforms offer fixed or floating interest rates.
A fixed interest rate is a steady or constant rate charged on a liability. This means you will only have to pay a fixed amount of interest throughout your payment period. This can be applicable for the entire term or just part of your payment term. On the other hand, a floating interest rate is a rate that highly depends on the market movement. This means that the amount may go up or down without further notice.
Some say that fixed interest rates can be a bit higher than floating interest rates, but it can be your option if you’re comfortable with paying a fixed amount of interest. Floating rates, on the flip side, can be slightly lower than fixed rates. However, you can never tell when the percentage rate will shoot up or drop and how high or low it can go. You might encounter other types of interest rates as you go along, so it’ll be helpful to talk to your loan provider so you can better understand how they work.
Should you consider applying for a crypto loan?
With all the things we’ve discussed so far, you’re probably thinking about whether trying your hands on crypto loans is a good idea or not. So here are other key points you might want to look into to help you come to a decision.
If you’re a newbie in the crypto space and want to have fractions of BTC by not taking the trading route, you can opt to borrow Bitcoin to get started. Sending and receiving money through cryptos is much cheaper and faster than with many banks and other third-party financial institutions.
Crypto loans are well suited for those who don’t have bank accounts. Since cryptos don’t require personal information, credit scores, or bank history, it’s much easier to access them and the financial services they support. This includes bill payments, everyday purchases, remittances, and a lot more.
If you’re a Bitcoin investor who’s thinking of ways to grow your crypto without having to sell them, you might want to consider lending BTC. This way, you can make extra cash through its gains.
So, should you consider applying for a crypto loan or perhaps lending your BTC? As usual, we’ll leave the decision up to you!
*The content of this article is for informational purposes only. The opinions expressed here are not meant to be taken as financial, investment, or any other advice, nor do they express the opinion of Paxful.