Cryptocurrency loans

In the summer of 2019, the cryptocurrency industry was talking about only one thing – DeFi (decentralized finance). Forbes called this protocol “a new technology that revived the crypto industry.” Now financial services can be provided not only by banks and credit organizations, but also by cryptocurrency owners using DeFi tools. Moreover, the process has become fully automatic.

The smart contract itself will offer the borrower a favorable interest rate and will find a lender for him. Along with centralized cryptocurrency services, DeFi platforms have breathed new life into the field of crypto lending. In this article, we will answer questions about how you can get a loan in cryptocurrency today, consider its pros and cons in comparison with traditional loan products, and also provide a list of the most popular lending sites.

Why borrow in cryptocurrency?

There are many reasons why someone might need a digital money loan. For example:

• a trader wants to increase the trading balance in one of the crypto assets, not wanting to get involved in margin trading or sell another asset, freeing up funds;
• the investor urgently needed money, and at the moment there is a bearish trend in the market;
• the attractiveness of interest rates – for such a loan they are lower than in traditional financial institutions.

In all these cases, it becomes necessary to obtain a loan in cryptocurrency. The number of holders of digital coins in the world is constantly growing against the backdrop of another rise in the crypto market and new price records. This also causes an increased demand for crypto lending services. What can the blockchain industry offer to satisfy it? Let’s see.

Where to get a loan in cryptocurrency?

Unlike the financial system we are accustomed to, whose work is strictly regulated and supervised by regulators, the cryptocurrency industry in this respect resembles the times of the Wild West, where the rules were set by the one with the longer barrel and more cartridges. Therefore, cryptocurrency lending services do not issue money only “according to a passport and a code”, but require collateral, which most often represents a certain number of top coins: bitcoin, ethereum, lightcoin.

In addition to providing a security deposit in crypto, most services also require confirmation of the identity of the borrower. This is done to comply with KYC/AML rules. As a rule, the amount of the loan is from 50% to 90% of the amount of the pledge. A loan in bitcoin or another cryptocurrency that does not have support for smart contracts is somewhat more difficult to take than in tokens on the blockchain with smart contracts. For example, Ethereum can be sent to the address of a smart contract, which in response will transfer another token to the required address, while blocking the collateral until the loan is repaid. But you can’t do that with bitcoin. Therefore, within the framework of DeFi protocols, stablecoins based on bitcoin are created, and each project has its own stablecoin:

• sBTC from Synthetix – 1.5% of the tokenized bitcoin market;
• WBTC from BitGo (used on DeFi platforms Compound, Maker, Block Folio, Uniswap, CoinGecko, Aave, 0x) — 78% of the market;
• HBTC from the Huobi crypto exchange – 13%;
• renBTC from RenVM – 5.5%;
• pBTC, TBTC, oBTC, imBTC, etc. – 3% of the market.

Briefly, the scheme for obtaining a loan issued in bitcoin is as follows:

• the user sets the initial terms of the loan agreement, where he indicates the amount of the loan and its repayment period;
• the platform selects a lender/lenders who agree to issue funds under such conditions;
• the borrower transfers one of the types of cryptocurrency, with which the crypto-lending service works, to the address of the collateral smart contract;
• the equivalent in some tokenized bitcoin is credited to its balance (more precisely, a part of the deposit amount);
• the borrower exchanges the received “bitcoins-on-blockchain-ethereum” for regular BTC;
• after the debt is returned to the user’s wallet with a loan, his deposit is returned.

It turns out that getting a loan in bitcoins is much easier than a loan in regular currency in real credit institutions. The advantage is that in the crypto industry this whole process is automated. The only thing is that when registering on the lending platform, you will have to go through identity verification by providing a scan of your passport and, possibly, some other documents.

The most popular services for issuing loans in bitcoins

Here is a list of the most popular Internet sites for borrowing (this rating is based on user queries on the Internet and is not a recommendation):

1. Blockfi. BTC, ETH, LTC are accepted as collateral. Loans are issued in US dollars and stablecoins. Loans are issued at 4.5% and higher for up to 12 months. The minimum amount is $10,000, the LTV indicator (the ratio of the loan amount to the amount of collateral, multiplied by 100%) is up to 50%. For example, if 10 ETH ($43,000 at the time of writing) is pledged as collateral, then the loan amount cannot exceed $21,500 or the equivalent in stablecoins.
2. Celsius network. BTC, ETH, BCH, XRP, LTC, DASH, EOS are accepted as collateral. The loan can be obtained in USD and stablecoins. The minimum loan amount is from $1,000 for a period of six months to three years. LTV indicator – up to 50%.
3. Compound Finance. Collateral is accepted in WBTC, DAI, ETH, USDC (dollar stablecoin of the Coinbase crypto exchange), BAT, ZRX, REP. Loans are issued in the same currencies. Interest rate – from 2.1% to 8.5% depending on the chosen currency. The maximum loan term is 1 year, LTV is up to 75%.
4. Youhodler. Three dozen cryptocurrencies can be deposited as collateral. Loans are issued in fiat currency (USD, EUR, CHF, GBP) and USDT stablecoin. The minimum loan amount is $5,000 for any period. The platform offers the highest LTV on the market (90% for loans up to 1 month, 70% for 1-6 months, 50% for more than six months). The lending rate is from 0.7% to 8% depending on the term.

You can mention another option, and unsecured, allowing you to take loans without security – Flash Loans, or instant loans. In this case, the process is somewhat more complicated. The main requirement of a flash loan is that the receipt and repayment must occur in the same block of transactions, i.e. take only a few seconds.

The question arises, why does anyone need money for just a few moments? The answer is simple: traders for arbitrage trading. Moreover, with the help of an instant loan, you can get millions of dollars without collateral. In addition, the commission for such transfers is negligible, only about 0.09%. True, a person is unlikely to have time to manually perform all the necessary operations in order to profitably take advantage of the opportunities of a flash loan. Therefore, at present, the DeFi segment is literally teeming with bots looking for any opportunity for arbitrage using instant loans.

Is it profitable to borrow in bitcoins?

We suggest evaluating the advantages and disadvantages of crypto loans before concluding whether they are beneficial or not.

The advantages include:

• low interest rates compared to conventional banks or credit organizations;
• quick receipt of borrowed funds;
• low commissions even with loans for large amounts;
• the possibility of obtaining additional funds without selling the available cryptocurrency.

Of the shortcomings, it should be noted:

• an abundance of scammers who simply pocket the pledge;
• risks associated with the high volatility of cryptocurrencies;
• legislative vacuum in this area.

Based on the above, it can be summarized that crypto loans are not yet very suitable for ordinary people and inexperienced users of digital assets. Those who are familiar with crypto have an excellent opportunity to receive financial support if necessary, without sponsoring banks through high interest payments and without selling their cryptocurrency in a bear market.

It will be possible to talk about the general acceptance of a new lending instrument only when there is a clear and understandable regulation in this industry.

Disclaimer. Investing in any financial asset carries the risk of losing capital. Nothing in this text can be considered an investment recommendation or an offer to buy/sell any financial instruments. For all their actions in the stock market, each investor bears full responsibility independently.