During the past few years, cryptocurrency has revolutionized the financial world, and one of its most significant advantages has been the ability to obtain a loan without collateral. It is now possible for holders of digital assets to receive liquid funds without selling their investments by using Bitcoin and other cryptocurrencies as collateral.
What is a Crypto Loan?
This type of lending agreement is a method by which a trader receives liquid funds without selling their cryptocurrencies, such as fiat money (cash) or stablecoins. Instead, they use their crypto assets as collateral. Why would anyone consider taking out a crypto loan? Some reasons include avoiding short-term capital gains tax on their digital assets since they will be holding them for a long time or expecting the value of their assets to increase in the future.
Types of Crypto Loans
Crypto loans can be divided into two categories: custodial and non-custodial. Before you apply for a cryptocurrency loan, you should understand the differences between these two types of loans.
Custodial crypto loans (CeFi)
A central entity takes custody of the collateral in a custodial crypto loan. This entity controls the private keys of the collateralized assets during the repayment period.
Non-custodial crypto loans (DeFi)
Smart contracts enforce the terms of decentralized finance (DeFi) loans instead of a central authority. The trader is responsible for controlling the assets’ private keys in this situation. However, DeFi loans give users greater control over their assets, even though they have higher interest rates than custodial loans.
Non-Collateral Crypto Loans: How Do They Work?
Non-collateralized crypto loans are loans in which the borrower does not have to use digital assets instead of collateral. These loans can be classified into two types: uncollateralized and semi-collateralized.
Semi-collateralized loans
As part of a semi-collateralized crypto loan, one party transfers a small amount of their cryptocurrency to cover a more significant loan. However, semi-collateralized loans give borrowers more access to funds than their current assets typically allow. This type of loan can slow the growth of the crypto market due to the locked crypto.
Uncollateralized loans
It is based on the consensus approval principle to approve non-collateralized loans. Token holders can vote on prospective borrowers’ creditworthiness based on the loan amount, loan conditions, on-chain credit data, off-chain credit data, the risk involved, and borrower history. These loans are hoped to facilitate the market’s growth by allowing new users and non-experts to access the system. Users can build their crypto-borrowing reputation and creditworthiness by making timely loan payments.
Risks Associated with Non-Collateral Loan
While non-collateral loans are beneficial, they also come with some risks. These risks include:
Getting scammed
Scammers often target unsuspecting borrowers. Before choosing a crypto lender, you should conduct thorough research to avoid becoming a victim of fraudsters. Ensure that the lender has no history of fraud cases in the media, whether the loan terms seem too good to be true, and whether online customer reviews are positive.
High-interest rates
Legitimate cryptocurrency lenders are unlikely to provide loans without collateral, as doing so exposes them to the risk of losing money if borrowers fail to repay their obligations. However, some crypto lenders may agree to such loans but with high-interest rates.
Technical issues
All cryptocurrency trades face the danger of protocols failing due to a technical issue. Non-custodial loans have a slightly higher level of funds if a crypto lender goes bankrupt or disappears with their funds.
Best Crypto Loan Providers
Now that we have covered the basics of crypto loans let us dive into the best providers in the market.
- BlockFi: BlockFi is one of the best-known crypto loan providers in the market. It offers loans to customers who use Bitcoin, Ether, Litecoin, and several other cryptocurrencies as collateral. BlockFi provides custodial loans with interest rates ranging from 4.5% to 9.75%, depending on the loan amount and term.
- Celsius: Celsius is another popular crypto loan provider that offers interest rates ranging from 1.25% to 12%. The platform supports several cryptocurrencies, including Bitcoin, Ether, and Litecoin.
- Nexo: Nexo offers custodial crypto loans with interest rates ranging from 5.9% to 11.9%, depending on the loan amount and term. The platform supports several cryptocurrencies, including Bitcoin, Ether, and Litecoin.
- Aave: Aave is a non-custodial DeFi lending platform that supports several cryptocurrencies, including Bitcoin, Ether, and stablecoins. It offers loans without collateral, with interest rates ranging from 0.25% to 15%, depending on the borrower’s creditworthiness.
- MakerDAO: MakerDAO is a DeFi platform that provides loans without collateral. It offers its stablecoin called DAI, which is pegged to the US dollar. The interest rates on MakerDAO loans range from 0% to 6%, depending on the market demand for DAI.
Conclusion
For cryptocurrency holders, crypto loans allow them to obtain funds without selling their digital assets. These loans are associated with various risks, including high-interest rates, technical issues, and counterparty risks. The appropriate crypto loan provider selection is also essential, as it should offer competitive interest rates and have a reputation for legitimacy and security.