If you have cryptocurrencies like Bitcoin and Ethereum, you must have explored various options to invest. These will be outside of spot trading, like in trading or margin trading. However, if you do not trade in them with caution, the risk factor increases.
Traders can also consider another option that will use more traditional mechanisms and help investors get more out of their assets. If the market is stagnant, your holding BTC or ETH could be difficult, especially if you need funds. Most traders will not want to liquidate these assets. So to get funds, you can opt for a crypto loan. In crypto loans, any trader can decide between centralized and decentralized routes. Let us know more about Crypto loans.
Understanding Crypto Loans
The functionality of a crypto loan is similar to a traditional loan. One major factor which makes them different is the manner in which the funds are accounted for. With conventional loans, the banks and other institutions can use your credit scores to find the amount of risk. In crypto loans, no importance is given to credit cards. Traders just use these crypto-assets as collateral for the lender until the loan is returned.
Apart from this difference, the mechanisms behind the loans are almost similar. Crypto loans will collect interest hourly. The terms for loans are shorter in comparison to traditional loans. With crypto loans, the traders can borrow from 7 to 180 days on various platforms. These crypto loans operate on a short time scale as cryptocurrencies are more volatile than traditional currencies. This makes dealing in them riskier for both parties. In case a cryptocurrency’s value falls sharply, the collateral on which the loan was taken will lose value too. That is why they use hourly rates and have short borrowing times.
Crypto Loans Without Collateral
Crypto loans without collateral or unsecured crypto loans are new financial offerings. They offer short-term liquidity. You receive loans in fiat or cryptocurrency. The basic idea is to use cryptocurrency in place of property and gold for collateral purposes. Many platforms make it simple for you to get a crypto loan with no collateral. You can opt for flash loans, but you do need to have proper crypto knowledge to apply. Do your research before you move forward on the loans without collateral.
Why Investors Choose Crypto Loans
There are few reasons why investors choose crypto loans. Traders avoid liquidating their assets, and when the funds are required, it is best to have an option to take a loan. Another use of a crypto loan is to get interest on the assets.
You can use crypto lending platforms such as BTC as collateral, you can get a loan in BUSD or USDT (any stable coin). This collateral will be more than the loan, but once they pay the loan with interest, this collateral is returned. The BTC may have increased in value, thus making the borrower a profit.
Another advantage is that the funds can be acquired very quickly. You get the loans instantly. Your assets get converted into liquid instantly. If you go for Centralized (CeFi) options, you will have to comply with regulations and fill the KYC. But the Centralized platforms are more secure and reputable. They protect the crypto assets with insurance or use cold storage to do so.
The Decentralized (DeFi) options also have similar functions, but their interest rates are nothing compared to the Centralized platforms. DeFi does not need personal identification, and you can access it at any time. But you must bear the risk of smart contract hacks.
CeFi and DeFi are both quite transparent, and they resolve on a blockchain. Plus, they offer their users the chance to create savings accounts with them.