Should you jump the hoop with Crypto Lending

Christopher Doyle

In recent days it seems like everyone is talking about Cryptocurrency. In the age of constant financial innovation, have you wondered about crypto lending? If so, the first question that comes to mind for many is - what is Cryptocurrency?

Cryptocurrency is digital money that has been developed through blockchain technology. During the past decade, improvements in security have enabled currencies like Bitcoin, Ethereum, and Cardano to grow the digital currency market to over $1 trillion.

Cryptolending is where you allow a counterparty to borrow your cryptocurrency (such as Bitcoin) for an eventual return of principal and interest, denominated in either cryptocurrency or traditional cash. On the other hand, you may also seek loans in traditional currency using crypto collateral.

So, how does it work! In order to participate in crypto-lending, it is easiest to register with lending sites such as BlockFi, Celsius or Binance as it is unlikely that you will find a counterparty on your own or with support from a traditional financial institution. In both types of crypto-lending, centralized and decentralized, individuals who are in need of cash will deposit their “crypto-keys'' with a third-party algorithm that will hold them while their crypto is being used as a collateral. The lender will provide the borrower with cash up to an LTV of 50% on the crypto. Platforms like BlockFi, Celsius, and Binance provide an outlet for secure crypto-transactions, with person-to-person lending also an option.

While it might sound a bit complicated there are quite a few benefits of Crypto lending. For the borrower, being a crypto lender might be appealing because the majority of the time it does not require a credit check. Borrowers may use this method if they do not have sufficient traditional assets that would be accepted as collateral by banks or credit unions.

For the lender, it's a great option because the rate of interest is significantly higher than that in a traditional loan. While you may only receive <1% for depositing your money in a savings account, lending Bitcoin provides 6% interest with lesser-known cryptocurrencies like USDT offering 12%. This phenomenon occurs because of a low supply of capital and high demand for cryptocurrencies. Cyptolending is an emerging financial sector dedicated to providing an alternative lending mechanism for non-traditional clients while rewarding lenders with high interest.

In hindsight, crypto might look lucrative, however, it has its downfalls. Although the interest rates are higher, so are the risks. Over one billion USD of cryptocurrencies were hacked in 2018 along with a barrage of scam lenders. In 2019, the US Department of Justice charged BitClub Network with operating a $722 million ponzi scheme on the backs of uninformed investors. Cryptocurrencies have also been shunned by governments and banks because of their association with organized cybercrime. Moreover, many people speculate with cryptocurrencies, due to which volatility can be expected. Crypto-lending is high-risk, high-reward as cryptocurrency is less regulated, speculative, and new.

Like any emerging industry, investment comes with volatility. While true believers can look to high interest rates and financial accessibility as crypto-lending’s raison d'etre, remember not to put all your eggs in one basket, especially considering the risk associated with cryptocurrency.

Sources:

• https://www.bloomberg.com/news/articles/2021-03-27/crypto-shadow-banking-explained-and-why-12-yields-are-common

• https://www.ledger.com/academy/what-is-crypto-lending

• https://www.rbcroyalbank.com/rates/persacct.html (Savings Account interest rates)

• https://cryptopro.app/history-of-cryptocurrency-exchange-hacks/#:~:text=The%20first%20major%20hack%3A%20Mt.&text=Gox%20began%20operating%20in%202010,Bitcoin%20exchange%20in%20the%20world.&text=In%20February%202014%2C%20the%20company,the%20time%2C%20around%20%24350%20million. (Hacks)

• https://www.acfe.com/fraud-examiner.aspx?id=4295009818#:~:text=Generally%2C%20the%20fraudsters%20solicit%20investments,abscond%20with%20their%20investors'%20money. (Ponzi)