All you need to know about crypto loans in 2022

All you need to know about crypto loans in 2022

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Mike
Mike

An editor at Coincrop


21 Jan 2022 | 9 min read
35,583 views

N

ot many people know that it’s now possible to get a cryptocurrency loan. This certainly isn’t something you can get from your traditional high street bank. 

In this guide:

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’s the difference?

On the face of it, a cryptocurrency loan shares the basic similarities for a conventional fiat money bank loan – a lender lends, and a borrower borrows.  Here’s where there are key differences:

    • A conventional bank loan involves a borrower and an institution that acts as a lender. Some cryptocurrency loans are run as protocols which removes the need for a third party (such as a bank).

    • A cryptocurrency loan means no credit checks. Other than standard KYC (know-your-customer) verification there are no additional checks. In fact, some companies will even skip the KYC stage.

Crucially, in order to get a loan, you must put forward cryptocurrency as collateral. Loans in the fiat world are normally un-collateralised – that is you don’t have to provide any form of security.

There is more – you are required to over collateralise your loan. This ensures that in the event of your collateral falling in value, the lender is further protected from losses.

Market volatility and crypto loans

You may now be thinking that cryptocurrency loans sound amazing – maybe you’re thinking this is a great way to borrow money without having to sell your cryptocurrency (and the consequential tax implications).

There is an important consideration that you need to be made aware of – the loan-to-value ratio (LTV). This value represents the ratio between the loan amount and deposited collateral.

LTV ratios of 50% are typically meaning that you need to deposit twice as much collateral in regard to the amount that you wish to borrow.  For example:

Assuming a Bitcoin price of $40,000, and you want to borrow $20,000 of money, that you will need to deposit 1 Bitcoin as collateral. At the end of the loan when you have repaid the outstanding amount (plus any interest), your collateral will be returned to you.

We must consider the scenario where the value of your collateral increases above the agreed LTV ratio. In the event that it goes too high and you fail to deposit more collateral in order to bring the LTV ratio down, you risk being liquidated in what is known as a margin call.

How do I get a crypto loan?

Getting a loan can be very quick but it depends on the nature of the lending platform.

Decentralised lending platforms will just require you to deposit the collateral – the loan amount will then be immediately sent. No KYC verification will be required.

Centralised lending platforms will typically have an on-boarding process in which you must verify your identity – this can take several days on busy platforms. Once you have passed KYC verifications, you can provide your collateral and receive your loan in return.

Centralised lending platforms have the advantage that they are typically easier to use than decentralised providers. 

The incentive for lenders

Lets briefly consider the motivations for lenders in the cryptocurrency lending space. Loans are only made possible because individuals are willing to make available their own liquidity in order to earn high yields of interest.

Individuals providing stablecoin liquidity can typically earn between 8% and 12% APY – cryptocurrency deposits of prominent assets such as Bitcoin and Ethereum typically earn between 4% and 6%.

Decentralised lending platforms

The key point about decentralised lending platforms (DEXs) is the lack of an intermediary that could interfere in some way. Individuals are free to exchange cryptocurrency assets without the abstacles of KYC.  Below are several well known decentralised lending platforms:

- Compound describes itself as an “algorithmic, autonomous interest rate protocol built...to unlock a universe of open financial applications”. Essentially it allows you to borrow or deposit interest-yielding cryptocurrency. Lenders deposit their assets into liquidity pools in order that borrowers can take loans when they provide their cryptocurrency collateral assets.

- Aave is a decentralised finance (DeFi) protocol enabling the lending and borrowing of cryptocurrency. Interestingly, it allsosupports flash loans – these are un-collateralised loans that have a very short life. The Aave protocol runs on the Ethereum blockchain.

- Venus is an algorithmic money market that operates on the Binance Smart Chain (BSC). It facilitates loans to borrowers when they provide assets as collateral. 

Centralised lending platforms

In contrast to their decentralised counterparts, centralised lending platforms are identifiable organisations that have a duty to operate in a manner that is similar to traditional fiat lending organisations.  There is a requirement to identify customers through a KYC process.  Below are several well known centralised lending platforms:

Celsius is a centralised blockchain-based savings and borrowing platform.  Individuals with cryptocurrencies can deposit the assets and earn rewards in return.  Users that wish to borrow can take out a loan (for currency or other cryptocurrencies) that is collateralised by other cryptocurrency assets.

Below are some example rates for borrowing using Celsius:

Asset to borrowLTVCollateralAPY Rate

Gemini Dollar (GUSD)

Collateral Celsius

Celsius (CEL)

1.00%

25%

Gemini Dollar (GUSD)

Collateral Binance Coin

Binance Coin (BNB)

1.00%

25%

Gemini Dollar (GUSD)

Collateral Binance Coin

Binance Coin (BNB)

6.95%

33%

Paxos Standard (PAX)

Collateral Celsius

Celsius (CEL)

1.00%

25%

Paxos Standard (PAX)

Collateral Binance Coin

Binance Coin (BNB)

1.00%

25%

BlockFi is very similar to Celsius offering saving and borrowing products. Below are some example rates for borrowing on BlockFi:

Asset to borrowLTVCollateralAPY Rate

US Dollar (USD)

Collateral Bitcoin

Bitcoin (BTC)

9.75%

50%

US Dollar (USD)

Collateral Bitcoin

Bitcoin (BTC)

7.90%

35%

US Dollar (USD)

Collateral Bitcoin

Bitcoin (BTC)

4.50%

20%

US Dollar (USD)

Collateral Ethereum

Ethereum (ETH)

9.75%

50%

US Dollar (USD)

Collateral Ethereum

Ethereum (ETH)

7.90%

35%


Mike

Mike

An editor at Coincrop
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Mike 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 putting his latest car project back together.


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Celsius

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