2024-05-29 14:02:19
Авторка: Inna Svatenko 
What Is a Crypto Loan and How Does It Work?
If a trader or crypto investor does not have enough money to open new positions or personal needs, they can borrow it. For this, there is no need to go to the bank, worry about credit rating, and wait for hours for the application approval. You can get a cryptocurrency loan in a few clicks through an exchange or specialized platforms.
We have studied the terms and conditions, the processing procedure, and the pros and cons of crypto loans and are ready to share this information with you.
Content
What Is a Cryptocurrency Loan?
A crypto loan is a service that allows you to borrow digital money. They can be lent against cryptocurrency collateral or without collateral using a smart contract.
Example
Imagine you urgently need money to buy a new prospective cryptocurrency. You have 50 ETH in your wallet, but you don’t want to sell it because you are sure the coins will soon rise in value. You are also concerned that if you withdraw ETH now and want to buy them back later, you will be able to afford fewer coins because of the increase in value.
In this situation, a cryptocurrency loan can be the best solution. You will get the right amount of money against the collateral of your existing ETH.
Where Can I Get a Crypto Loan?
You can get a crypto loan on exchanges and DeFi and P2P platforms. Private investors and crypto funds also provide similar services. The most popular are BTCPOP, Bitbond, LoanBase, and Binance. You can borrow money from anywhere, so a cryptocurrency loan in Ukraine is also available.
What Is the Mechanism of Cryptocurrency Lending?
The procedure for issuing a crypto loan may differ on various platforms, but in most cases, it includes the following steps:
- Registration. The user creates an account and passes verification (on demand) on the chosen platform.
- Pledging. The cryptocurrency is transferred to the smart contract address or the platform account.
- Valuation. The value of the collateral is assessed based on current market prices. The loan amount is a certain percentage of the collateral value (e.g., 50%-70%). This difference helps the service provider cover losses if the collateral price starts to decline due to market volatility.
- Negotiating terms and conditions. The interest rate, loan term, and possible fees are set.
- Issuance of the crypto loan. The money is transferred to the recipient’s wallet.
The borrower pays interest on the loan according to the agreement’s terms. At the end of the term, after repaying the principal amount with interest, the lender returns the pledged cryptocurrency. If the borrower cannot repay the loan, the collateral is charged to cover the debt.
Types of Crypto Loans
Crypto loans can differ depending on the terms and conditions of service providers and the processing procedure. Let’s take a closer look at the main types.
Flash loans
The loan is granted and repaid in a single transaction on the blockchain. No collateral is required, as the loan is fully managed by a smart contract. This technology ensures that the debt is either repaid in full before the transaction is completed or the transaction is canceled. Flash loans are often used for arbitrage, refinancing, and other strategies that require quick access to large sums of money.
Collateralized loans
Money is loaned against crypto collateral and for a longer term than flash loans. On DeFi platforms, secured loans are issued using smart contracts that determine the loan amount, secure the collateral, and monitor compliance with loan terms. Centralized platforms independently assess the value of collateral and make loan decisions. Collateral is stored in their wallets or special vaults.
P2P loans
These are loans that users lend to each other directly on P2P platforms. The terms can be flexible and negotiated between the borrower and the lender.
Pros and Cons of Using Cryptocurrency Loans
After we have figured out how to take a crypto loan, let’s discuss the advantages and disadvantages of such a service.
Pros of cryptocurrency loans:
- High probability of approval;
- Transparent lending process;
- Passive income for holders (long-term investors) who can lend cryptocurrency and earn interest.
Crypto loans also have downsides:
- The collateral can be sold if the value of the cryptocurrency in which it was lent drops dramatically;
- A smart contract, if there are vulnerabilities and bugs, can be exposed to malicious attacks;
- Due to market volatility or false forecasts, the loan may not bring the expected benefits but, on the contrary, provoke financial losses.
FAQ
In such a case, the lender will charge your collateral, after which you will no longer be able to pay it back.
To make the right decision, you should weigh the risks, objectively assess your financial situation, and analyze the cryptocurrency market. You should also read the lenders‘ terms and conditions carefully to see if they are right for you.
The law on regulating the crypto market in Ukraine has not yet been adopted. Nevertheless, Ukrainians can use the services of international platforms, including those specializing in crypto loans.
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