Like any finance sector, understanding loans and lending in decentralized finance is important. Moreover, whether you want a better understanding of the process or hope to take out a loan of your own, you’ve come to the right place. So, let’s discuss how to borrow crypto.
Cryptocurrency can be a very unique asset in the finance sector. However, in the realm of loans and lending, the asset is quite similar to many others. Cryptocurrency can serve as collateral, and lenders can also provide crypto loans. Now, let’s delve more into the process.
So, first, let’s quickly dissect the fundamentals of a crypto loan. Like any kind of normal loan, you lack the necessary asset for a specific purpose, so you apply for a loan. If you are approved, you receive the funds and a repayment plan. Then, you pay back the loan, maybe monthly, with the interest rate agreed upon by you and the loan provider.
Now, borrowing against your crypto is a little different but also very similar. Specifically, a crypto loan is a secured loan in which your cryptocurrency holdings are used as collateral. Subsequently, if you make the appropriate payments, your holdings must be returned at the end of the terms agreed upon.
There are two types of cryptocurrency loans: the first is a centralized finance loan or a CeFi loan. Moreover, for this loan, the lender will control your crypto holders over the duration of the repayment term.
Conversely, there is decentralized finance, or DeFi, loan. Specifically, this option utilizes smart contract technology. You maintain control of your own holdings, but the lender is able to take action against your account over the repayment period if you do not withhold the agreed-upon terms.
Finally, a crypto loan can be used for a variety of things. Indeed, a crypto loan can be utilized like a personal loan if an individual with large crypto holdings desires liquidity but doesn’t want to sell their assets.
Conclusively, There are crypto loans that allow you to borrow other cryptocurrencies. For this option, you would put your cryptocurrency up as collateral, and receive different crypto assets. This option is entirely dependent on the needs of both the lender and the borrower.
How to Borrow
Now that we’ve delved into the actual fundamentals of the loan, let’s discuss the process. Specifically, let’s present the various facets necessary for you to borrow crypto.
Choose the Platform
First, you’re going to want to choose what borrowing platform is best for you. Specifically, this platform will act as the go-between for you and the loan provider. This is a vitally important step, and it is important to do the necessary research. Specifically, options like Nexo, Binance, and CoinRabbit present good starting points.
Choose Your Collateral
Then, you will want to decide what crypto you will be putting up as collateral. This is a requirement to obtain a crypto loan, as you must select what assets from your holdings you will collateralize to the lender.
There are clearly a host of options, and some of the most popular cryptocurrencies are also the most popular collateral for loans. Specifically, Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC) present positive options. These digital assets are commonly approved by most loan providers, as these assets will back the loan.
Decide on the Type
Now, you will decide whether or not you want to opt for an interest-only or interest and-principal loan. Moreover, both options present certain benefits and drawbacks that you must compare based on your preferences.
Choose the Amount and Finalize
Finally, you will want to select which crypto you want to borrow and how much you’d like to borrow. Moreover, you can use crypto as collateral to borrow fiat currency, stablecoins, or other types of crypto. Again, you must identify what option is best for you.
Subsequently, you will connect your wallet to a specific cryptocurrency exchange or borrowing platform. Then, you will conclude by transferring your collateral to the platform and finalizing the specific loan. After this, you should be set up with your first crypto loan.