You can get a bitcoin loan on the best crypto lending platforms in 2022; see the risks associated with it and how to do it.
Indeed, the first time you heard about cryptocurrency loans, you were likely confused. Your reaction maybe because it reminds you of traditional financial systems (which cryptos parade themselves as being different from). Well, don’t be alarmed; investors and traders in the digital assets industry have been receiving and giving out loans for a long time now.
Bitcoin loans have become even more popular with the increasing acceptance of cryptos. Recently, Elon Musk announced that his electric car company, Tesla, would accept Dogecoin for merchandise sales. As expected, this caused the coin’s price to rise and attract newbies.
You may be new in the digital money world (or not) and want to acquire as much knowledge as you can (a commendable effort); crypto lending is an essential aspect of the booming financial industry.
Can I get a loan on Bitcoin?
Getting a loan on Bitcoin does not work like the traditional lending mechanism of physical banks. Here, you are not borrowing 0.5 BTC to pay at a later time. Instead, you are borrowing against it, i.e., using it as collateral.
Related article: 10 sites to see when visiting Las Vegas.
How do loans work with Bitcoin?
Let me paint a scenario to make the point clearer. Say you want to get a cash loan from Miss A, and you are both cryptocurrency enthusiasts and owners. You will offer a particular crypto asset (like 0.2 BTC, 1 ETH, 2.5 Doge, or whatever Miss A accepts as equivalent) and receive the cash that you need. Then, when you pay her back, you receive your assets back.
Note that this is different from a flash loan, popular on Ethereum platforms. Flash loans do not require collateral and are paid back almost instantaneously, hence synonymous with speed.
However, while the scenario described above is prevalent, those who outrightly lend out cryptos to make additional income via interest. Yet, it is still different in that they are almost always done on Crypto lending platforms or bitcoin loan platforms to guarantee that the borrower fulfills their obligations.
What are the risks of bitcoin loans?
Yes, several people are looking for free bitcoin loans or loans without collateral. While you should also beware of the desperate ones, you should be aware of the risk of bitcoin lending.
- Price volatility: Bitcoin price is as volatile as a candle flame caught in the evening breeze. Volatility might be good for investors who understand how to play the market, but it may not be when it comes to using crypto as collateral. Why? When you agree to the terms of a crypto loan, there is a condition that your collateral has to be up to a certain value. With fluctuations, you may be required to add cryptos while your loan is still ongoing or risk losing the entire asset.
- Insecurity: Cryptocurrency is hardly, if ever, insured, meaning that if the platform you have trusted with your collateral suffers a hack and loses funds, there may be no way for you to recover it. Thus, it is crucial that you only use reputable platforms.
Types of Bitcoin lending platforms
The two most used crypto lending platforms are Coinbase and Binance. Their impeccable reputations are why they are so famous and in widespread use. These platforms are divided into:
- CeFi Platforms: Also known as centralized finance platforms, these crypto loan platforms control both the assets of the lender and the collateral of the borrower. By doing this, it is in charge of the entire lending process and can enforce moves when conditions are not meant. One disadvantage of these kinds of platforms is that they require users to provide personal information, which many crypto users try to avoid.
- DeFi Platforms: Decentralized finance platforms also provide smart contract software instead of holding collateral. This way, the entire process is automated, and users can stay anonymous. For a smart contract to work, the lender and borrower must agree on the same conditions programmed into the contract and executed when they are satisfied.
Best crypto lending platforms 2022
To choose the best platform to get a bitcoin loan in 2022, you must put the following in first place:
- Only select platforms that offer favorable interest rates for your crypto assets.
- Look out for hidden costs and charges for using the platform.
- Learn about the risks associated with the platform (if any) to avoid losing funds and leaking personal details.
- Opt for platforms that allow for flexible loan durations.
- Get to know the risks to your collateral.
- Check to see if the platform has minimum deposit requirements and if you can afford it.
Now that you have learned what crypto lending is and how to choose the best bitcoin loan platform in 2022, I hope you go about borrowing wisely. There is also an article that might interest you here: What caused the Bitcoin price crash after the 2021 boom?