Crypto-lending attracts high returns with high risk – How to borrow cryptocurrencies | 29/06/22

• Crypto lending is trendy
• Interesting returns entice
• Total loss possible

Crypto loans are a crypto-based loan where the loan business is usually processed through special lending platforms that bring lenders and borrowers together. Unlike classic credit marketplaces, the lender cannot choose who he lends his money to. Instead, he makes his coins available to a stock exchange with crypto lending, so that they can then lend the coins to other users of the respective platform. The lender therefore has no insight into a loan project or the background of the borrower.

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Such cryptocurrencies are usually over-plated, which means that the borrower has to pay in a higher percentage of the cryptocurrency than they are allowed to borrow. But why should he even borrow a cryptocurrency if he already owns it? The answer to this question is that he can use such a loan to take advantage of capital gains (but also capital losses).

The parties involved agree in advance on the number of coins to be lent and the duration of the use transfer. Depending on the stock exchange chosen, there is the possibility of flexible periods, but there is also the possibility of periods of between seven days and several years.

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Interesting return

In addition, the interest amount is also determined, where this percentage depends on the demand for cryptocurrencies, the platform used, the cryptocurrency lent and the number of coins issued. According to “Coinratgeber”, returns in the mid-digit percentage range are not uncommon for the lender. It is significantly more than a day-to-day deposit in a conventional bank. Even returns in the double-digit percentage range are possible.

At the end of the credit period, the lender gets its coins back plus the contractually agreed interest rates. The technical platform gets a small part of this interest.

Many risks

As with loans in classic fiat currencies, the borrower’s credit risk must be taken into account. To mitigate this risk, cryptocurrencies require borrowers to pledge their own assets as collateral. If the situation then arises that you can not repay a loan, these so-called securities can be liquidated to reduce the lender’s losses or at best to compensate.

However, other cryptocurrencies are usually used as collateral and their value can fluctuate widely. This is a risk for the lender, but for the borrower it has the advantage that he does not have to sell his own coins and therefore can continue to benefit from any price development.

In addition, there are other risks associated with cryptocurrency lending. In view of the strong volatility in the crypto market, the coins may suffer significant price losses in a very short time, so that the investment may even have become worthless once it has been repaid.

A total loss can also occur if the exchange used is hacked or goes bankrupt. According to the saying “Not your keys, not your coins”, storing your own coins on a centralized cryptocurrency lending platform already poses a risk because the coins are then no longer in your control.

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