A bitcoin backed loans secured by cryptocurrency work like a regular loans: the borrower borrows money for a set period and pledges value, in our case, cryptocurrency. When the term expires, the borrower is obliged to return the loan amount and interest in the same currency in which he borrowed it. A relevant question is can you get a loan for crypto? You can get a loan in local currency or digital assets (BTC, ETH, DOGE).
How does a loan against cryptocurrency work?
Due to the volatility of cryptocurrency prices, the value of the collateral can rise or fall, but the loan itself is always fixed in fiat money. If the price of bitcoin has risen over the life of the loan, the borrower can repay the loan at a profit. Here’s how it works:
– Initial bitcoin price: $3800.
– Loan rate: 8% per annum.
– Loan amount: $15,000.
– Loan term: 180 days.
– Discount: 30%.
– Amount of deposit: 5.86157174 BTC
– Initial collateral value: $22,273
– Final bitcoin price: $10,000.
– Accrued interest: $590.
– Amount to be returned: $15,590.
– Amount of the returned deposit: 5.86157174 BTC
– Final value of the pledge: $58 615
– Borrower’s income from the transaction: $35,752.
On the Biterest platform, the currency of the loan is U.S. dollars, hence all amounts are fixed in USD. Credit can be received in fiat money or cryptocurrency. Transactions are settled based on the current exchange rate of the issuing currency to USD.
Why do I need cryptocurrency loans?
Cryptocurrency collateral loans are an alternative to exchanges and exchanges. Such loans are needed in order not to sell cryptocurrency at an unfavorable rate and thereby preserve the digital asset, which can grow in value.
The main difference between loans with cryptocurrency collateral and their traditional counterparts is the high volatility of digital assets that act as collateral. This is also the main value of such a service: if the collateral grows in value, the transaction will be profitable for the borrower. For the lender, the profit is always fixed in USD.
What happens if the rate of the cryptocurrency in the pledge changes?
If the rate of the cryptocurrency collateral goes up, the value of the entire collateral also goes up. When the exchange rate falls, the total value of the collateral falls as well. If the value of the collateral falls to the amount that the borrower owes back, a margin call occurs. This means that the deal closes and the collateral goes to the lender to repay the debt. This way the lender gets his investment and the borrower keeps the loan amount but loses the collateral. For the borrower, the situation is equivalent to selling the cryptocurrency at the market rate.
The risk of a margin call depends on the discount percentage that the borrower specifies. The higher the discount, the lower the risk of closing the transaction because of the margin call.
What happens if you don’t repay the loan?
On p2p cryptocurrency lending platforms, disputes are resolved through the use of multi-sig wallets. If the borrower fails to pay on time, the platform transfers its private key to the lender, who unlocks the multi-sig address and reimburses the loan amount against the collateral.
What happens if the rate of the pledged cryptocurrency changes?
If the rate of the cryptocurrency pledge goes up, the value of the entire pledge goes up as well. When the rate goes down, the total value of the collateral goes down as well. If the value of the collateral falls to the amount that the borrower owes back, a margin call occurs. This means that the deal closes and the collateral is released to the creditor to repay the debt.
This way the lender gets his investment and the borrower keeps the loan amount but loses the collateral. For the borrower, the situation is equivalent to selling the cryptocurrency at the market rate. The risk of a margin call depends on the discount percentage that the borrower specifies. The higher the discount, the lower the risk of closing the transaction because of the margin call.
The difference between such a service and a crypto-exchange is that there is no access to the world market. Users of the resource create orders to buy or sell one asset for another. It is not a trade, but an exchange. For example, you want to sell Bitcoin for Ethereum and create an order. If there is another user who has Ethereum and is happy with the price, he will accept your terms and buy Bitcoin from you.
P2P digital asset exchange services allow you to exchange cryptocurrencies for fiat money and vice versa. They can be beneficial if you need to get one asset urgently at the expense of another. Often, such services offer a chance to make an exchange at better quotes than the market. In terms of how to invest in cryptocurrency, it is convenient if P2P exchanges are integrated into a cryptocurrency exchange platform. Like CoinLoan.io:
- The main advantages: you determine the terms of the deal yourself, and you can buy/sell the asset more profitably than the market value.
- The main disadvantages: sometimes it is difficult to find a partner who will agree to your terms; the service takes its percentage of each order.
What happens if I don’t pay back the loan?
On p2p platforms for secured cryptocurrency lending, disputes are resolved through the use of multi-sig wallets. If the borrower fails to pay the debt on time, the platform transfers its private key to the lender, who unlocks the multi-sig address and reimburses the loan amount against the collateral.
Where to buy cryptocurrency for investment?
Talking about how to invest in cryptocurrency, it is impossible not to touch on the question of how to buy it. There are three main options – a cryptocurrency exchange, a P2P exchange service, and a digital asset exchange website. Let’s take a closer look at each of them.
A cryptocurrency exchange is a platform for exchanging between cryptocurrencies, as well as with the participation of fiat funds at market quotes. Each of the exchanges has its trading terminal, usually based on TradingView, with charts and indicators for technical analysis. You can trade through these terminals in a browser from a PC or on a mobile device by downloading an application. Technically, trading at a crypto exchange is the same as at a currency broker.
For novice traders, cryptocurrency exchanges usually prepare educational guides. They often feature not only spot, but also margin and derivatives trading. Top crypto exchanges sell their services for passive income, including the aforementioned stacking. Also, note that many exchanges offer their multi-currency wallets. For example, Binance has a universal wallet Trust Wallet.
- The main advantages: a lot of assets, a considerable palette of buying and selling options, and additional opportunities.
- Main disadvantages: registration with verification is required; most exchanges have a limited choice of fiat currencies.
The best platform for investing
You already have a general idea of how to invest in cryptocurrency. Choosing a cryptocurrency exchange plays a key role because you will be trading and investing on its terms. Based on the sum of factors, MOFT experts suggest crypto-exchange Binance as a top option. It launched in 2017 and is headquartered in Hong Kong. The exchange works with residents of all countries without regional restrictions. The service is translated into 26 languages, the customer service supports 11 languages.
Key features and benefits: the crypto exchange offers classic and advanced trading, and there is margin trading with leverage and derivatives, including futures and options. Fees are below the average in the segment – 0.1% for a toker/maker on the spot. There is a built-in P2P exchange service, as well as a quick cryptocurrency purchase service. It is possible to pay directly by bank card, bank transfer, or from other cryptocurrency wallets. For beginners, there are excellent guides. In terms of passive earning, the site has introduced a unique, comprehensive solution Binance Earn with different stacking options.
CoinLoan guarantees payments on loans backed by cryptocurrencies, so lenders can feel secure in a safe environment. The company offers a cryptocurrency exchange in addition to borrowing and lending fiat currencies such as euros.