You may rub the back of your neck every time you stare at the freefalls of your crypto assets on the screen. Still confident in the long-term perspective, you continue to scratch your head about how to make money from your digital assets in this current downward market.
Crypto lending is a good way out. You may earn interest by lending out cryptos to borrowers through a crypto lending platform. That sounds simple?
Each lending platform has its requirements, and its services are offered differently from others. The following can give a clear picture of what you should know about crypto lending.
What is Crypto Lending & How does it Work?
Crypto lending is a financial transaction where a lender loans out crypto assets to a borrower in cash or other crypto assets in return for interest income through a lending platform. A successful crypto lending transaction must take place through the 3 parties.
Crypto lender
A crypto owner lends to borrowers and earns interest on cryptocurrencies in return. He will receive a borrower’s cryptocurrencies as collateral for the loan. If the borrower fails to pay back the loan and defaults on interest payments, the lender will sell the collateral and receive the principal amount with interest owed. A lender cannot trade the assets pledged.
Crypto borrower
A borrower, unwilling to sell crypto assets, pledges digital tokens as collateral to raise funds from a crypto lender and promises to repay the principal and interest to a crypto lender after an agreed-upon time. If the borrower fails to pay back the loan with interest, the lender has a right to sell the collateral to compensate for the loan and interest loss.
Crypto lending platform
Like a bank, the platform is where lenders and borrowers come and make deals. But, unlike a bank, a lending platform does not act as a middle man like guaranteeing or fact-checking a borrower but only provides minimum support like autonomous and standard protocols facilitating transactions.
Types of Crypto Lending Platforms
Automated platforms
As a lender, you earn interest income once you deposit crypto assets into a wallet on the platform. Find out more on the best crypto wallet you can get in Singapore.
Manual platforms
Like a fixed deposit product offered by a bank, a lender must commit to a fixed amount and a fixed period to earn a specified interest income.
Advantages of using crypto lending platforms
1. Easy access to financing
Borrowers don’t need complicated procedures required by traditional financial institutions like banks to approve loans as decentralized finance. Even credit checks are not necessary except for crypto assets as needed for pledges.
2. Automated programs running loan programs
Crypto lending platforms use automated programs, e.g., “smart contract,” to manage the whole process from “application to monitor” and requires little human input, doing most crypto lending work and making the process more efficient.
3. Expeditious access to profits
The procedure is simple: Depositing cryptos into a vault on the platform, lenders start earning interests from their assets. Lending platforms use automated protocols to manage businesses.
Disadvantages of using crypto lending platforms
1. Liquidation risk
Crypto assets are assets of high volatility. Sudden asset-price fall may lead to immediate liquidation of collaterals to repay crypto loans owed to lenders. Even over-collateralized assets are not exempt from the risk.
2. Programm breakdown
It is not news that crypto accounts are prey for hackers and computer programs are always subject to attacks. There is a probability that the system can break down by assault, and investors will suffer losses.
As a diversified strategy of passive income investment, a crypto loan is a high-risk investing activity due to its instability nature, even though a stablecoin’s value is still fluctuating. You should review your risk acceptance level regularly.
The Best Crypto Lending Platforms for 2022
1. BlockFi
BlokFi manages USD15 billion in crypto assets, an established lending platform in the US. They offer flexible options for investors depending on investment amounts and currency types.
The options offered:
| Minimum amounts required | N/A |
| Lock-in periods | N/A, withdrawal at any time |
| Annual Percentage Yields(APY) or interest income | Non-stablecoins(Bitcoins, Ethereum, Litecoins): up to 5% Stablecoins: up to 9.25% |
| Payout frequency | Monthly |
| Extra rewards available | Monthly compound interests |
| Regulating jurisdiction | Ongoing application with the US SEC Bermuda Monetary Authority |
What we like about BlockFi:
- High-interest rates for crypto assets, especially stablecoin
- Various cryptocurrency types on offer
- No minimum investment amount and no lock-up period
2. Aqru
Aqru’s registered company, Accru Finance Limited, is a Bulgaria company whose parent company, Accru Finance Ltd, is licensed in the UK. The lending platform offers a high-interest rate of up to 7%. Besides, lenders can deposit fiat currency into an account, and the option makes it appealing to non-crypto investors.
| Minimum amounts required | EURO110 or British pound 118 |
| Lock-in periods | N/A, withdrawal at any time |
| Annual Percentage Yields(APY) or interest income | Non-stablecoins(Bitcoins, Ethereum, Litecoins): up to 1% Stablecoins: up to 7% |
| Payout frequency | Daily |
| Extra rewards avalaible | N/A |
| Regulating jurisdiction | Regulated by the Lithuanian Government |
What we like about Aqru
- The attractive interest rate for stablecoin
- No lock-up period
3. Crypto.com
Registered in Singapore, Crypto.com hosts close to 100 crypto assets. It offers stablecoin investors an attractive rate of 6% without any lock-up requirement. Investors committed to a longer-term will earn a maximum of 10% for their investments. The lending platform offers higher yields on select tokens, e.g., its native tokens, for 14.5% maximum.
| Minimum amounts required | Subject to coin types Maximum USD500,000 or equivalent |
| Lock-in periods | tailor-made; flexible options |
| Annual Percentage Yields(APY) or interest income | Subject to coin types |
| Payout frequency | Weekly |
| Extra rewards avalaible | Offers available to Crypto.com’s coin only |
What we like about Crypto.com
- Hosting of various cryptocurrencies
- High-interest rates
- More rate incentives for crypto.com’s coins
4. YouHodler
Headquartered in London, the UK, the platform emphasizes security and carries USD150 million pooled crime insurance for clients’ assets. YouHodler accepts primary fiat money like USD, GPD, EUR, CHF, and cryptos like Bitcoins, Ethereum, and popular stablecoins, e.g., USDT, USDC. The company uses Ledger Vaults and Fireblocks to enhance asset security.
| Minimum amounts required | Minimum USD100 |
| Lock-in periods | N/A, withdrawal at any time |
| Annual Percentage Yields(APY) or interest income | Up to 12.3% |
| Payout frequency | Weekly |
| Extra rewards available | Compounded interest |
| Regulation | A member of the blockchain association 3FA security level |
What we like about YouHodler
- No lock-in period; withdrawal anytime
- USD150 million pooled crime insurance
- Support for various crypto assets
- Suitable for beginning investors
5. Nexo
Like other lending platforms, Nexo offers up to 6% APY on cryptocurrencies. If you stake its native crypto, it gives you 8% APY, the maximum. Stablecoins USDC and USCT can yield up to 20% APY.
Headquartered in London, the UK, Nexo, similar to YouHodler, carries USD$375 million insurance against clients’ assets.
| Minimum amounts required | It depends on crypto-asset types |
| Lock-in periods | Various from being flexible to one month |
| Annual Percentage Yields(APY) or interest income | Up to 36% |
| Payout frequency | Daily |
| Extra rewards available | High-interest rates on Nexo assets |
| Regulation | Licensed in states in the US |
What we like about Nexo
- Flexible options for lock-up periods; withdrawal anytime for no lock-up period
- USD375 million pooled crime insurance
- Support for various digital assets
- Up to 20% APY for stablecoins
Factors to Consider in Choosing a Crypto Loan
You should review and consider offers by lending platforms. Besides crypto lending rates, the following factors listed are critical to decisions on the appropriate institution.
Collateral
Most lending platforms accept popular cryptocurrencies as collateral yet may not be willing to allow all token types for financing. You should consult your platform if you intend to use particular cryptocurrencies as a loan pledge.
Loan-to-value(LTV)
It is a loan ratio to a crypto asset value as collateral. For example, if a platform has a 35% LTV for a maximum limit of an approved loan, you can get a 35% loan subject to a collateral value. The LTV varies depending on asset types and lending platforms. You should research before applying.
Loan currency
First, you should decide what loan currency. If you think fiat or hard money is your choice, you should find a lending company with sufficient reserve for your needs. Likewise, you must ensure a lending platform has enough reserve for a cryptocurrency you require if you choose a crypto asset as your loan currency.
Second, platforms may deviate from one another in loan terms even if the same loan currency is available. Comparisons are necessary for your needs to minimize the costs.
Loan terms
You should admit an old saying: “The devil is in the details.” Loan agreements may differ considerably among various lending platforms concerning collateral liquidation. The institutions have different requirements regarding conditions, e.g., the grace period and the admitted percentage fall in the collateral value under which they liquidate an asset. They are the essential terms you should consider.
Annual percentage rate (APR)
The APR is the loan interest rate a landing platform charges. Like others, different platforms charge different rates on different crypto assets. You should study them based on your requirements to minimize interest costs.
How to Borrow
Though lending platforms have borrowing procedures different from others, basic requirements are the same for all. You can access their apps or websites and follow guidelines. The standard requirements are collateral types, loan amounts, and loan terms. The time of getting a loan is quicker from a lending platform than in a conventional intitution.
Final Thoughts
The Crypto lending industry, with a related industry boom, has flourished in recent years. But the lending platforms differ on investment borrowing terms, among others. Both crypto-asset lenders and borrowers should research before making decisions.
Key takeaways
- 3 pillars form the crypto industry: lenders, borrowers, and lending platforms
- Lending platforms offer attractive returns to lenders, especially the native cryptos.
- Lending crypto lending platforms have various requirements concerning LTV, loan terms, and collateral, among others.
- Lenders should examine their risk acceptance level concerning terms like annual percentage yields and lock-in periods.
- Lenders should be vigilant about legal development.
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