Are 0% APR Crypto Loans A Safe Bet?

Are 0% APR Crypto Loans A Safe Bet?

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Jonathan
Jonathan

An editor at Coincrop


18 Dec 2021 | 11 min read
27,501 views

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ou may not know it, but it's possible to get a loan in the world of crypto currencies.  In the traditional world of finance, we are accustomed to approaching banks to borrow money. The bank will assess our credit rating, our ability to repay the loan, the purpose of the loan etc. and if they are satisfied may choose to lend.

In this guide:

What is a crypto loan?

How does a crypto loan work?

What can I borrow?

Who can I borrow from?

What are the benefits of a crypto loan?

What are the disadvantages/risks of a crypto loan?

Are 0% APR Crypto Loans A Safe Bet

Top 5 highest rated crypto loan providers

Top 5 Tether loans using Bitcoin collateral

Top 5 USDC loans using Bitcoin collateral

Disclaimer: All of the information written on Coincrop is without influence and based on our analysis. No guarantee is offered concerning the accuracy of this information and therefore, any individual following up on it does as such completely at their own risk. Rates are correct at time of publication.

What is a crypto loan?

Crypto loans are a very different product to those in the traditional world of finance yet they achieve the same purpose as bank loans in lending to a consumer. But that is where the similarities end:

  • Crypto loans are collateralised. That is, in order to borrow the individual must be will willing to put forward existing crypto currency assets that they already hold.

  • Crypto lenders don’t typically lend fiat currency. Instead, they usually lend stable coins such as Tether or USDC.

 

How does a crypto loan work?

Let’s consider an example customer: Bill wants to borrow $10,000 for 12 months. He finds a crypto lender who is advertising an interest rate of 5.25% and a loan-to-value (LTV) of 25%. The lender is willing to provide the loan in the form of Tether (USDT).

Based on a Bitcoin price of $49,000, Bill must give his lender 0.8195 Bitcoin (approximately $40,000) in order to borrow. As we can see from the example, Bill is required to give his lender far more than he wishes to borrow – we refer to this as over collateralising.

Once Bill decides to proceed with the loan, he transfers the 0.8195 Bitcoin to the lender. In return, they send Bill $10,000 of Tether.

At the end of the 12 months, Bill must repay the $10,000 loan together with the interest (approximately $500). Once he does this, the lender will repay the original 0.8195 Bitcoin that was provided as collateral.

It is possible that Bill can borrow and not actually pay any interest. If we consider the scenario in which the price of Bitcoin rises to $100,000, the value of Bills collateral has doubled effectively meaning that he has borrowed at no cost.

The reverse should also be considered in respect of the Bitcoin price. If the price of Bitcoin falls, the lender may require additional collateral in order to main the loan-to-value of 25%. If the borrower is unable to put forward this additional crypto currency (referred to as a margin call), then their loan could be liquidated. In the event of such liquidation, the borrower loses all of their Bitcoin collateral.

 

What can I borrow?

The majority of crypto lenders lend crypto currency stable coins to borrowers – that is the two most popular Tether (USDT) and USDC. It is possible to borrow crypto currencies such as Bitcoin and Ethereum but not as popular.

A smaller number of companies will lend fiat currency.

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Who can I borrow from?

Broadly crypto loan lenders can be categorised as either centralised or decentralised. Decentralised lenders are part of the DeFi (decentralised finance) world and beyond the scope of this guide. Such loans can be complex and are aimed at advanced users.

A centralised crypto borrowing industry has emerged in the form of a number of companies that will lend against collateral.

At the end of the guide, we have listed the top five lenders based on our own ratings. We have also included some example loans to give an idea of interest rates and collateral required.

 

What are the benefits of a crypto loan?

Borrow without selling - The biggest benefit of a crypto loan is the possibility of borrowing without actually selling your crypto currency. If you think that the price of your collateral (e.g. Bitcoin) is going to rise then a crypto loan may be a more sensible approach as opposed to selling the crypto currency.

Avoid tax liability - Most countries will impose a form of capital gains taxation when a crypto currency is sold. Similarly, many countries do not consider loans against assets as a taxable event thus borrowing against crypto currency collateral allows the borrowing to access capital without a incurring tax.

No credit checks – In traditional fiat currency borrowing, the lender will undertake a credit check of the individual in order to determine if they are likely to repay the loan. Crypto loans do not require such credit checking as the collateral is the safeguard against the borrowing failing to repay the loan.

Flexibility – Some lenders will allow the borrower to extend the duration of the loan. This simple process would be far more difficult in the traditional finance world of borrowing.

 

What are the disadvantages/risks of a crypto loan?

Limited borrow assets - Most crypto lenders only lend crypto assets such as stable coins. Now if you require such capital for spending in the fiat world the borrowed stable coins would then need to be turned into fiat currency.

Margin call / liquidation – As already mentioned, most lenders will require that your initial loan-to-value is maintained during the lifetime of the loan. In the event that the value of your collateral falls, it would be required that you deposit additional crypto currency. If you were unable to provide additional funds then there is a risk that you are liquidated and lose all your collateral.

Failure of the lender – In the event of severe price volatility or a hacking attempt, there is the possibility that the lender could fail. This raises the possibility that the borrower would lose their collateral.

Lack of regulation – The crypto lending market (like much of the crypto industry) is evolving at a rapid pace. Regulators have been slow to define rules potentially leading customers to unfair business practises.

 

Are 0% APR Crypto Loans A Safe Bet

A number of lenders have begun to offer borrowing products with a headline grabbing zero percent rate of interest. Such loans are unheard of in the traditional world of finance. In order to obtain such loans, the loan-to-value (LTV) rate is such that borrowers have to significantly over-collateralise in order to obtain the loan.

Borrowers should carefully consider whether they wish to risk so much collateral with a particular lender.

 

Top 5 highest rated crypto loan providers

OrganizationProductsWebsiteRating
Abra13https://abra.com
Crypto.com148https://crypto.com
Coinbase6https://coinbase.com
Bitfinex0https://bitfinex.com

 

Top 5 Tether loans using Bitcoin collateral

Asset to borrowLTVCollateralAPY Rate

Wrapped Bitcoin (WBTC)

Collateral Kyber Network Crystal Legacy

Kyber Network Crystal Legacy (KNCL)

3.00%

60%

Wrapped Bitcoin (WBTC)

Collateral Kyber Network

Kyber Network (KNC)

3.00%

60%

Wrapped Bitcoin (WBTC)

Collateral Chainlink

Chainlink (LINK)

3.00%

60%

Wrapped Bitcoin (WBTC)

Collateral Aave [OLD]

Aave [OLD] (LEND)

3.00%

60%

Wrapped Bitcoin (WBTC)

Collateral Maker

Maker (MKR)

3.00%

60%

 

Top 5 USDC loans using Bitcoin collateral

Asset to borrowLTVCollateralAPY Rate

Wrapped Bitcoin (WBTC)

Collateral Kyber Network Crystal Legacy

Kyber Network Crystal Legacy (KNCL)

3.00%

60%

Wrapped Bitcoin (WBTC)

Collateral Kyber Network

Kyber Network (KNC)

3.00%

60%

Wrapped Bitcoin (WBTC)

Collateral Chainlink

Chainlink (LINK)

3.00%

60%

Wrapped Bitcoin (WBTC)

Collateral Aave [OLD]

Aave [OLD] (LEND)

3.00%

60%

Wrapped Bitcoin (WBTC)

Collateral Maker

Maker (MKR)

3.00%

60%

 


Jonathan

Jonathan

An editor at Coincrop
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Jonathan is a Crop Crop staff writer based in the UK, covering the best rates for cryptocurrency earning and borrowing products. When not at work, he's likely sailing.


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