What Is Crypto Lending and How Does It Work?

Crypto

During stagnant market cycles, holding BTC or ETH can be difficult when funds are required. It often happens that traders do not want to liquidate their assets for the sake of holding and are not enthusiastic about the necessity to pay taxes. Fortunately, there is always a solution – you can get a loan in cryptocurrency. In the world of cryptocurrency loans, traders can choose between centralized and decentralized routes. And there are a couple of differences between the two.

Decentralized finance (DeFi) became popular in 2019 and 2020; it is now one of the main use cases for blockchain technology. With this new trend around DeFi, you can lend coin, and there are also many new ways to increase the number of crypto assets in your wallet. In this review, we will dive deep into what cryptocurrency lending is and how it works.

Examples of Using Cryptocurrency Lending

The best way to understand how crypto lending platforms and markets work is to explore the ways how users can participate in cryptocurrency trading:

  • Overdraft – It is available to both individuals and legal entities. Overdraft employs a certain limit, the amount of which depends on the turnover on the account. As a rule, a borrower is obliged to repay the overdraft in full with a frequency of once every two weeks or a month. This is necessary to be able to use the funds again within the allocated limit.
  • Tax-free liquidity in USD – Crypto-holders’ portfolios may contain a significant portion of their personal savings, but selling these assets when they need cash triggers a taxable event. Using your cryptocurrency as collateral to get a dollar loan can be a great way to cover costs without any investment risks or having to pay taxes on your profits.
  • Margin trading/leverage – Margin trading allows you to open a position that is larger than your financial capacity. Essentially, this allows traders to access a certain amount of funds to increase their order size, which in turn raises the return on a winning trade. For example, if you place a margin trade with a leverage of “2.0,” only half of that position is used as the initial margin. When it comes to “5.0,” only a fifth part of it is required. This allows you to open larger positions than your account would allow.
  • Flash credits – Flash credit works through a smart contract that allows you to borrow funds without any collateral. However, with the return of the loan within one transaction, that is one block. Thus, a flash loan allows a person to borrow funds for free until they repay the loan by the end of the same transaction. Everything happens very quickly. Such a loan is designed to limit the trader’s risk by allowing the trader to use the borrowed money to take advantage of the price differentials in the markets.

Conclusion

As you can see, there are many options when it comes to cryptocurrency lending, and they seem to be quite profitable for all. In the near future, crypto lending will offer a number of unique opportunities to generate income, increase liquidity, and improve the performance of their assets. So, keep an eye on this market.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.