Like a house, car, or other investment, your cryptocurrency can serve as collateral for crypto loans, which are low-interest loans, same-day funding and no credit checks.
The downside? As the value of your crypto goes down, you may need to use more cryptocurrencies.
That will be the biggest disadvantage of cryptocurrencies, says Travis Gatzemeier, certified financial planner and founder of Kinetix Financial Planning near Dallas. “It’s not a normal, stable asset that you use to borrow.”
Despite the risks, cryptocurrencies and loans against you have become popular topics on public forums like Reddit and YouTube, but is a cryptocurrency loan right for you?
What is cryptocurrency?
Cryptocurrency entered the financial dialogue in 2008 with a whitepaper by an anonymous programmer on the concept of Bitcoin.
Bitcoin is a cryptocurrency or digital form of money. It may seem complex and depending on how you use it, it can be, but they are essentially digital tokens rather than physical money. It can be exchanged for goods and services on blockchain, a digital ledger that tracks every bitcoin transaction.
The idea should be pretty simple, says Ariel ZetlinJones, associate professor of economics at Carnegie Mellon University in Pittsburgh
Throughout history, we have accepted physical tokens in exchange for goods and services and believe that in the future we can exchange these tokens as money for other goods and services. Blockchain and Bitcoin allow the same type of transactions, but without physical tokens, says ZetlinJones.
What is a crypto loan?
A crypto loan is a type of secured loan, similar to a car loan, where you promise an asset for secure funding.
In this case, the cryptocurrency is the asset that is offered to a lender in exchange for cash that is paid out in installments. If you fail to repay the loan, the lender will liquidate or confiscate the cryptocurrency.
Cryptocurrency lenders like BlockFi, Celsius and Unchained Capital have relatively low annual interest rates and loan terms of one to three years, but high minimum loan amounts.
For example, BlockFi’s crypto loans start at 4.5% APR on one-year loans, but the minimum loan amount is $ 10,000.
Why borrow against crypto?
A crypto loan can be useful if someone owns a significant amount of crypto and wants to liquidate it without having to sell it and potentially pay tax, says Gatzemeier.
These funds could then be used to purchase or invest in a business, similar to borrowing a personal loan.
Also, borrowers could get lower interest rates with a crypto-backed loan, and unlike personal loans, there is no credit check.
The problem of crypto loans
From April 2021 to October 2021, Bitcoin’s BTCUSD, its price hovered 4.07% between about $ 30,000 and $ 64,000.
The unstable value of crypto can lead to a margin call that requires the borrower to deposit more crypto in order to get the value of the original promise.
If the value of your pledged cryptocurrencies falls below a threshold set by the lender, you have a limited period of time to pledge additional cryptocurrencies.
In crypto-language, the relationship between the loan amount and the value of your collateral is known as the mortgage lending value, or LTV. For example, the cryptocurrency lender BlockFi maximum LTV is 70%. At this point, borrowers have 72 hours to power up crypto.
In addition to volatile prices, crypto loans are also not insured by the federal government, says Gatzemeier. For example, if you lose your money in a security breach, compensation is not guaranteed.
Alternatives to borrowing against your crypto
If you have equity in your home: A home equity line of credit allows you to borrow up to 85% of the value of your home, but be careful, you could lose your home if you don’t pay.
If you are looking for a lower interest rate: A credit card with 0% interest offers free financing for 14 to 18 months. Note, however, that after the introductory phase you can pay high interest on unpaid balances.
If you have poor credit: Credit unions often have flexible rates and terms. They also take into account your membership history, which means they may have softer requirements.
If you need a small loan: A small personal loan – less than 2,000 euros – is a viable option. However, the rates can be high depending on your credit profile and income.
