Borrowing Crypto Is Making Loans Easier Than Ever
Cryptocurrencies are becoming a major player in the global economy. With more than $1.5 trillion already invested in the crypto market, new applications for the average consumer have emerged. Now, borrowing cryptocurrency is a real possibility with multiple benefits.
Here in TurboWallet, we already talked about why you should integrate crypto into your personal finance. But today, we will be talking about an increasingly important niche in the crypto market: Decentralized Finance (DeFi)
DeFi took traditional financial systems and rebuilt them to create a fairer and more accessible ecosystem for everyone.
From saving to borrowing money, DeFi can open new doors for you to take your finances to the internet age. All without the need of trusting any of the third parties that have been known to fail.
With crypto being one of the best ways to invest money today, knowing how crypto loans can benefit you over traditional loans is essential. Not only will you be able to keep your investments prior to borrowing crypto, but you can also use it as a form of investment. The possibilities are endless!
What Is DeFi?
DeFi includes all financial products that are open to the public on a public decentralized blockchain network. Due to their decentralized nature, there are no middlemen involved you need to trust.
As DeFi platforms are intended to be open, no form of government-issued ID will be required to use it. This ensures you can access them from anywhere and at any time, as long as you have an internet connection.
Smart Contracts are one of the most important components of blockchain technology. They operate as contracts written in code that can self-execute once a condition is met.
By making use of smart contracts, DeFi can ensure that all the parties involved in a transaction get what they bargained for. This ensures the safety of your money and a high level of efficiency.
This financial flexibility and fairness that DeFi offers have been the major source of its growing popularity. Over the past year, the DeFi market grew from a capitalization of $1 billion in May 2020 to $86 billion in May 2021.
With the popularity of DeFi continuing to grow, knowing what it is and how to use it can quickly become a must. This is even more important when you consider that centralized platforms are starting to integrate DeFi principles into their operations.
Cryptocurrency Loans: What are They?
Borrowing crypto is one of the most revolutionary applications of DeFi, making its way to more centralized services. While different platforms will have a different approach and set of rules, the concept is simple: You use your existing crypto funds as collateral for borrowing money.
If you have $5k worth of crypto, a platform could allow you to lock them to borrow $4k. This means you wouldn’t be able to withdraw or use those $5k until you pay for the original loan.
This might sound counterintuitive. Why would someone borrow money if they already have money?
Well, there is not only a method to this madness… Let’s take a look at some of the differences between borrowing crypto and traditional loans!
No Need for Third Parties
In a traditional loan, a bank will work as an intermediary between a borrower and a lender. This is because the bank uses other users’ funds to lend you money and gain money based on the interest.
However, as everything is automated when borrowing crypto, crypto loans remove the third party. This can be done by using smart contracts to replace the mediator, ensuring transparency and efficiency.
Crypto protocols effectively operate by connecting both parties, allowing them to negotiate and complete loans without ever interfering with it.
However, another approach exists: Centralized platforms have emerged to offer crypto loans powered by blockchain but retaining a certain degree of centralization. This allows you to get the “best” of two worlds (which is relative) depending on your needs.
No Credit Checks Required
As every loan in crypto is backed by collateral, users are not required to have a positive credit score. The system makes sure that the lender receives the collateral if the borrower fails to pay it back.
This ensures that crypto loans are available to people with no credit history, creating a truly open system that boosts investment and innovation.
You Can Use Other Currencies
When getting a bank loan, you are likely to receive the same fiat currency used in your country. However, when taking a cryptocurrency loan, you might be able to get a different currency. This results in added flexibility depending on your needs.
This also opens the doors to investment opportunities, as many crypto investors borrow a certain cryptocurrency when they expect them to drop in value.
By using them immediately to invest in a cryptocurrency that they expect to do well, they are able to generate gains. While this surely is an advanced and risky strategy, it is only possible due to crypto loans.
Traditional bank lending is tedious. Not only will it take days for a loan to be approved in most cases, but you will also need to fill in a lot of documentation. Once the loan is approved, you will not always receive the funds immediately.
In the case of crypto loans, the process is immediate in most cases. This is a huge benefit if you need to have the funds available quickly.
Most banks will make you read a long contract full of conditions and small print. This not only makes the process take longer but also makes the conditions harder to understand, as well as less flexible.
When requesting a crypto exchange, transparency is a given. This ensures that you always know what the conditions are and as such, there won’t be any surprises.
Traditional Banking will usually not be affected by volatility in the same way as crypto loans. This is not only because of the use of fiat currencies but due to the use of the same currency to pay and receive the loan.
Cryptocurrency is known for its high volatility compared to fiat. While this is the same trait that opens the door to generate gains, the opposite is also true. When it comes to crypto loans, the same principle applies, you can gain or lose money depending on the market.
However, one of the good things about using collateral is that you can liquidate the loan at any point. This ensures you can cut your losses as soon as you realize what is happening, with the only result being that you used your existing funds.
In most cases, this won’t be an issue as it is likely you would have done the same anyway.
How to Borrow Cryptocurrency
There are many platforms on which you can borrow cryptocurrency, all of them offering different options. The first step when choosing which platform to use when borrowing crypto, is to identify your needs. Are you in need of a specific cryptocurrency? Need a long or short-term loan? How much money do you need?
Whereas some will allow you to borrow or lend fiat currency in exchange for crypto, some will be more limited. This is the same case with other loan conditions, making it essential for you to know what your needs are.
There are multiple DeFi and Centralized platforms out there that you can use. For example, BlockFi is a centralized option that in addition to all the benefits of DeFi, offers you the option to borrow in US Dollars. This is something that DeFi platforms can’t offer under most circumstances.
BlockFi and other centralized platforms also allow you to acquire fiat currency without having to go through another platform. This, in addition to an intuitive interface and customer support, makes it great if you are a beginner in the world of cryptocurrency.
If you are interested in entirely decentralized platforms, projects like Aave, Compounds, Curve, yEarn, and Maker, are all solid options.
However, you will need to have cryptocurrency before being able to get a loan. If you don’t have any, using BlockFi or other services like Robinhood will allow you to purchase crypto using fiat, all in a secure and fast manner.
Robinhood is also a good option if you are planning on borrowing crypto to trade it for another crypto asset, or just need to get fiat after using a DeFi platform to get your loan. It offers a crypto exchange and as it is a regulated company based in the US, you will be able to use it to get fiat currency.
Whatever option you choose, make sure to do your research regarding the specific platform to ensure it is safe. Borrowing crypto should be an advantage, not a risk!
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