What Are Cryptocurrency Loans - Should You Invest in Them?

One of the most exciting new areas of cryptocurrency in the next few years will likely revolve around blockchain based lending. This new industry will offer an interesting opportunity not only for those who need loans but also for those with extra capital lying around.

The internet allowed peer to peer loans to flourish years ago as an alternative to banks or traditional investment vehicles, but the blockchain will take this one step further, making it not only easier but also safer to become a lender or to acquire lending to fund your ventures.

In this article, we’ll explain what cryptocurrency lending is and how any investors can utilize it to add valuable passive income or even an investment hedge to their portfolio.

What is cryptocurrency lending?

A cryptocurrency loan is a financial arrangement that typically happens in a peer to peer environment. A borrower must often put up some type of collateral in order to be approved for loans, and then a lender can fund it using their own tokens or even fiat currency.

The borrower will then repay the lender over the course of many months with an agreed upon interest rate. The lender sets the interest rate and the duration of the loan.

The benefits of this system are that the lender is sheltered from much of the risk due to the fact that the borrower has put up collateral in order to acquire the loan. The borrower is free from much of the regulation, hefty fees and red tape associated with getting a loan from a normal bank who will scrutinize your credit rating heavily regardless of your assets. This gives both parties the ability to transact freely, and it lowers the cost of these arrangements substantially.

What happens if the borrower does not repay the loan?

If a borrower does not repay their loan then they will lose their collateral. Depending on which platform they are using, this could actually be worth more than the loan itself. Since the collateral is always cryptocurrency tokens or coins, this could be worth even more than when they initially had taken out the loan.

For this reason, it’s unlikely that a borrower would default on their commitment, and that makes it a very safe and appealing option to potential lenders. Peer to peer lending has always carried significant risk since it was targeted to those who could not acquire traditional financing, but by utilizing token based collateral and smart contracts, cryptocurrency based lending remove much of this burden. This makes peer to peer lending a safer arrangement all around.

How does cryptocurrency lending work?

These loans are created via a platform which connects lenders and borrowers. This allows parties to set the terms of their loans such as interest rate or duration of the contract freely. After the terms are set, and the borrower and lender have agreed, the borrower sends their collateral to a smart contract.

The tokens are locked into this contract, and as long as they continue to make payments their assets are stowed safely. However, if they have not done so, then the lender can claim these tokens or coins to repay the debt.

Some sites also have what is known as a margin call. This means that if the assets within the contract fall below a certain value then the lender may have the option to sell the assets, or in some cases, the borrower will be allowed to add more collateral to cover what the platform designates as the safe zone. Borrowers should be careful of this in regards to volatile collateral.

Why would someone want to take out a cryptocurrency based loan?

Most people are used to getting a loan on credit, and so the idea of collateral-based lending may be confusing to them, but there are several legitimate reasons that you might want to do so. The most obvious being that you do not want to cash out your own assets.

If you were to take out a loan, then you could retain your coins or tokens, allowing them to continue to grow in value. At the end of the contract, they could be worth much more than what you had paid in interest.

It’s also a method for delaying tax events. If you need money but cashing out would lead to a large tax burden thanks to short-term capital gains taxes, you could instead take out a loan. Funds acquired through lending is not taxable income since it must be repaid.

You can then cash out your own cryptocurrency later at a reduced tax rate. Or, if you didn’t want to cash out at all, you could simply utilize this financing method for expenses, purchases, or other investments, and then continue to make payments on it.

Should you invest in cryptocurrency backed loans?

Cryptocurrency investors may scratch their head at the notion of earning a measly 5% in interest from lending when they could simply invest that money in coins or tokens. However, it may be best to think of this as a diversification method. If you were to make a particularly large gain on a certain investment, then you could cash some out to put into other areas.

If one of those avenues were in blockchain based loans, then you would not only have a new viable income stream which would pay you like clockwork every month but also an investment hedge.

If the market decides to nosedive, then you may be quite glad to have regular income coming in from your crypto loans. If cryptocurrency provides all or some of your monthly income, then this could be a welcome boost until the market calms down. If you don’t rely on your investments for income, then you could use these funds to buy up some dips while you wait for sprigs of green to start appearing in your portfolio again.

What blockchain projects offer loans?

There’s actually quite a few blockchain financing platforms coming into being, and some of them are already functioning. Whether you’re interested in becoming a lender, a borrower, or even an investor you should check out some of these projects.

Salt

The most recognizable blockchain collateral brand, Salt has been the first on the scene here. Potential borrowers can let Salt hold on to a number of different tokens, and then receive a fiat cash injection to their bank account in several different currencies.

They are unfortunately not as free with their terms, and they require you to have a large number of SALT tokens to use the site. They also have very strict KYC requirements, but that didn’t stop users from bombarding the platform so much that they had to actually stop taking applications for a while.

ETHLend

ETHLend is a decentralized lending platform that only deals in cryptocurrency. This allows them to go ahead without any KYC, but unfortunately they’ve recently blocked US users due to tightening restrictions. Why would you borrow more crypto with crypto? The ability to purchase additional assets or to even make better tax moves to save yourself some cash. The beta of this platform is live right now.

Elixir

This lending platform has lots of nifty tricks. It includes not only lending but also crowdfunding. They also offer loans that don’t need collateral for lending to friends or family members. They require no KYC, and loans even pay back an incentive to borrowers for making on-time payments. Who wouldn’t want that? Elixir has not yet released their platform yet though.

Conclusion

In closing, peer to peer financing on the blockchain is gearing up to be an exciting new industry that will benefit not only traders but also everyday people who want to get more out of their money.

If you’re looking for an investment vehicle that pays out regular monthly payments and can create a hedge against the rest of your portfolio, then cryptocurrency loans may be something you’ll want to look into. Just remember that the more diversified you are, that the better prepared you’ll be for a disaster.

You should also keep in mind that this is a long-term commitment. If you lend money to someone you need to be sure that you won’t need it again until the contract is up, because it will be locked away. This could be for 12 months or more. However, if you don’t have an immediate need for these funds, then loans could be a great addition to your portfolio.

A good strategy for this might be to actually fund several smaller loans that will end at different times. This staggering effect means that you would always have some type of free capital which you could either roll into another loan, use to purchase new assets you’re interested in, or even use for emergencies like big home or vehicle repairs. As long as you make sure to only invest what you don’t need immediately, loans can be a solid investment vehicle for the long term.