What Is Crypto Lending? A Beginner’s Guide

Usually, individuals hold their crypto assets until the price increases. Many investors feel uncomfortable leaving their cryptocurrency in a wallet, especially when the price is low. By sidestepping price fluctuations and intricate trading strategies, crypto lending is an excellent choice to generate passive income. 

As reported by Bankrate, the national average interest rate for savings currently stands at 0.58%. With crypto lending, you can easily lend your crypto assets and earn substantially higher interest without having to sell or trade the crypto assets. Moreover, you can borrow on crypto lending platforms using digital assets as collateral.

Let’s explore what crypto lending is and what it encompasses.

What Is Crypto Lending?

Crypto lending refers to a type of Decentralized Finance (DeFi) that enables investors to lend their cryptocurrencies to different borrowers in exchange for interest payments. These payments are called “crypto dividends.” Besides cryptocurrencies, numerous platforms also facilitate stablecoin lending.

Crypto Lending For Borrowers

This process is similar to using a home as collateral for a mortgage. In crypto lending, borrowers utilize their cryptocurrencies as collateral to get the loan. Subsequently, they repay the loan over time to retrieve their collateral. This is a simple way to obtain money when needed by tapping into the value of your crypto without having to sell it.

Interestingly, individuals get a crypto loan without collateral through a flash loan, but it’s not easy. Before diving into crypto lending without collateral, it’s critical to have a strong understanding of lending platforms and cryptocurrencies. The loan amount you can get depends on the collateral you provide, determined by a loan-to-value (LTV) ratio. For instance, if a platform offers a 50% LTV, you’ll need to stake $20,000 in crypto to secure a $10,000 loan.

Notably, when you use your crypto as collateral for a loan, you temporarily lose certain rights, like selling or trading, until you repay the loan in full.

Crypto Lending For Investors

In crypto Lending, investors participate by contributing their crypto assets to a pool managed by a lending platform. This platform oversees the entire process and then shares some of the interest with the investors.

Suppose you have 20 crypto coins that you do not want to sell or exchange. You can earn passive money by lending these coins through a cryptocurrency lending site. As a result, you will receive periodic interest payments, which might vary greatly depending on the platform and asset type. These interest rates could range from 3% to 7%, or even as high as 18% in the case of stablecoins.

How Does Crypto Lending Work?

To participate in crypto lending, you must find a reliable platform that provides this service. Numerous platforms are available, including Nexo, BlockFi, and Celsius Network. If you have got the platform, then the process is very easy.

1. Create An Account – Start by signing up on your chosen platform. This usually involves sharing basic information like your email and name and creating a password.
2. Deposit Cryptocurrency – Transfer your crypto assets into your account. These will be used for lending or borrowing.
3. Choose Your Option – Decide if you want to lend or borrow. If you’re lending, select the crypto, interest rate, and loan term. If you’re borrowing, choose the crypto you need, the interest rate, and the loan duration.
4. Wait For Approval – Once you’ve chosen, wait for the platform to approve your request. Depending on the platform, this might involve a credit check or verification.
5. Receive Funds – If you are a lender, you will receive money after approval. If you borrow, you will receive the cryptocurrency you borrowed.
6. Make Payments – If you borrow, you must make regular payments in order to repay the loan. This often entails paying interest monthly. If you lend, you will be paid periodically.
7. Close The Loan – When the loan period expires, you must refund the loan amount plus any remaining interest. If you lend, you will receive your assets as well as the interest you have earned. 

While each crypto lending site has its own processes and regulations, the overall process is the same across the board.

Key Factors To Consider When Making Money With Crypto Lending

• Choose a reputable lending platform with a solid track record and security.
• Plan your lending strategy, deciding the amount and duration. Longer terms often yield higher rewards but carry more risk.
• Set competitive interest rates to attract borrowers.
• Mitigate risk through due diligence, diversification, and collateral requirements.
• Reinvest earned interest to boost overall profits.

Best Lending Platforms

Given the number of options available in the market, finding a suitable lending platform can be difficult. To help you decide, we’ve compiled a list of the best lending sites to consider.

1. Celsius Network
2. Nexo
3. BlockFi
4. YouHodler
5. Crypto.com
6. Bitfinex
7. Aave
8. Compound
9. SALT Lending
10. Cred (formerly known as Libra Credit)

Crypto Lending Rates

The amount you receive in return for your investment will be determined by your chosen platform. Every crypto loan site has a unique ROI and varied dangers based on the platform. As a result, it is critical to explore various platforms to disperse the risks. This will also allow you to diversify your investments.

Regarding crypto financing, a typical yearly yield might be predicted. It ranges from 3% to 8% for cryptocurrencies and 10% to 18% for stablecoins. Every investing platform has a different rate per coin.

Crypto Lending Regulation

Regulatory certainty is crucial for any financial services. This is also true for crypto lending. While some jurisdictions are becoming more transparent about their crypto loan policies, others are more opaque than ever. The United States just said unequivocally that they believe crypto lending to be subject to SEC regulation. Firms that want to offer loan services in the United States must register with the SEC.

Crypto Lending Safety

Crypto lending, despite its allure of high returns, raises substantial safety concerns. Recent incidents involving estranged platforms like Celsius and Hodlnaut underscore these worries. These platforms halted operations, citing market conditions, and retained user assets, raising doubts about the safety of crypto lending.

This prompts the question: Is crypto lending secure? Compared to traditional finance, safety in crypto lending lags behind due to volatility, security threats, and regulatory gaps.

However, it’s crucial to recognize that reputable and reliable crypto lending platforms exist, implementing safeguards to address these concerns. Investors considering crypto lending should educate themselves about associated risks and choose platforms that prioritize risk mitigation.

Pros And Cons Of Crypto Lending

Pros

• Offers higher interest rates
• Individuals can withdraw their assets anytime
• Accessible to individuals with varying capital
• Diversify your investment portfolio beyond holding and trading cryptocurrencies
• No credit checks

Cons

• Lack of clear regulations
• Hacks and platform breaches may result in the loss
• No insurance coverage for deposited assets
• Borrowers may fail to repay loans
• Some lending platforms may lock up your assets for a certain period

Crypto Lending Vs. Crypto Staking

Here are the key distinctions between cryptocurrency staking and lending:

• Staking secures a blockchain network, while lending allows investors to earn interest to facilitate trading.
• Staking locks up your cryptocurrency for a defined length of time. However, many lending sites allow you to withdraw your gains whenever you want.
• Staking is suitable for long-term cryptocurrency investors who wish to maximize profits while minimizing risk.

Final Thoughts

Crypto lending offers a mutually beneficial arrangement within the DeFi ecosystem. Lenders generate passive income from their crypto holdings, while borrowers secure funds without selling their crypto assets.

To wrap up, the crypto lending sector is witnessing rapid growth, presenting numerous opportunities for investors seeking passive income from their crypto assets. Whether you opt for Celsius Network, YouHodler, BlockFi, Nexo, or Crypto.com, diligent research is essential to select the platform that aligns with your unique requirements and objectives.