What Crypto Lending Is, and Why You Need to Care About It

Crypto lending offers investors the chance to do something exciting, either with their own holdings, or someone else’s.

While hundreds of thousands of people head to online platforms such as Bitvavo, every day, worldwide to trade upon their bitcoin, check holdings, or just to keep up with crypto news, the growth of crypto assets has amassed quite a following. Day traders and longer-term investors alike have found a comfortable new niche to entrust their hard-earned money to. And for great reason, as bitcoin has built millionaires many times over.

However, as more novice investors turn to the market, becoming readily seasoned professionals, the promise of a heightened ROI is increased should investors hold on tight to those assets, as opposed to shuffling them about. Which, historically has seen gains, but the bitcoin being hoarded hasn’t really done much work while sitting, untouched, in online wallets. Until now.

Crypto-Backed Loans

At its core, crypto lending works similarly to standard lending practices when considering collateralized loans. Crypto owners will put up their crypto assets as collateral, and lenders will then loan fiat or stablecoins. Nothing too special-

Until.

Until you start to look at crypto-backed loans from the hallmark principles of Bitcoin. Meaning credit scores don’t matter, lending history and identity don’t come into play. Crypto backed loans are quite simply that: loans that are backed by crypto. The sphere in which crypto lending exists is also fully decentralized, allowing lenders to make money on locked up values and borrowers to gain access to more realistic interest rates.

The other intriguing part of crypto-backed loans is that they finally allow otherwise dormant assets to function within the marketplace. Bringing in greater liquidity, that would otherwise not be present as the HODL mindset is strong with cryptos like bitcoin. So really, it creates a win-win-win scenario, win for the borrower, win for the lender and a win for the crypto community at large.

Capital Gains That Do Work

Almost any seasoned crypto investor will tell you that sitting on your assets is a tried and true way to see greater ROI within a given cryptocurrency market. While it does indeed improve future gains, it also keeps owned crypto from doing any work while whiling away its time in a digital wallet. So crypto lending practices are actually producing better options for traders in how they manage their holdings, and how to make money, off of money.

While holding onto assets does serve to improve the scarcity of certain cryptos- most notably bitcoin, it does little else to support the market or promote use cases for the coin itself. Instead, stagnant assets can now begin to generate passive yields for lenders, in the same way, that institutions make money off of loans. Borrowers rejoice because they can easily choose what it is they’re being lent: either a decent sum of fiat- without certain tax headaches, or other cryptos, which they can trade, speculate, or use to help gain stake and say in certain blockchain events.

The crypto lending utility has also opened up new and attractive options for trading platforms- introducing things like bitcoin savings accounts that can provide interest rate yields. Some are offering these rates of near 8%, which blows standard savings account interest out of the water in most cases. Where the newfound infrastructure fails is that- you have to have capital in order to get capital- so collateralized loans work slightly differently to say, lines of credit. Making it a tough buy-in for people in areas that could most benefit from these resources.

Better Lending Practice

With crypto-backed loans and crypto lending, institutions are not handling these contracts- instead it’s all overseen by protocol. With additions to major blockchain networks, like smart contracts and DApps, crypto lending integrates seamlessly into the decentralized framework that cryptocurrencies were built on. Existing without KYC protocols, reliance on credit scores, or astronomic rates that get so high because of intermediary fees.

While there are centralized lending agencies within the crypto lending sphere, and of these, they do offer some nice return for lenders, there’s still a decent amount of decentralized lending networks to choose from. Both as a lender and a borrower. Many of the decentralized networks offer borrowers and lenders dynamic interest rates that more closely resemble market behaviors than they do a flat fee. Which can actually serve to stabilize the lending markets.

Should there be a sharp downturn in the price of bitcoin, interest rates with the rise and lower accordingly, keeping locked up investments more stable, and not requiring borrowers to put up extra collateral in bear markets. However, this can also sometimes lead to massive spikes in rates, which have been seen as high as 30% during times of extreme market turmoil. Which alone makes the practice at least more dynamic than traditional lending practices. Who’s to say which is better? Each has its own advantages and pitfalls- but for any owner of crypto, participating in the system could help support their market of choice and aid them in learning even more of the ins and outs of crypto investment.