Cryptocurrency loans: how they work

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Le cryptocurrency have now been introduced for such a number of years that they appear to be an established phenomenon. While there was no shortage of people skeptical about them at first, this has not been the case for some time now: in fact, they represent a recognized, widespread solution that is beginning to appear even established.

With cryptocurrencies, it is possible to purchase goods and services, both in the virtual and real world: more and more realities, large and small, are accepting them. But did you know that they can be used with regard to the lending? Cryptocurrency lending represents one of the new trends within virtual currencies. It is offered in formulas that are still in progress, given its novelty.

In this article we tell you more about how loans in cryptocurrency, taking us on a discovery of this new trend in the credit world.

 

Cryptocurrency loans: what are they?

Let us first try to give a comprehensive definition of what are cryptocurrency loans. Crypto lending is a financing formula in which . the borrower succeeds in obtaining a loan in fiat currency (the current one) or stablecoin, or cryptocurrencies whose price is pegged to fiat money, exchange-traded components or commodities. It does this by placing its crypto assets as collateral according to an interest rate agreed upon with the lending party.

To put it simply, in cryptocurrency lending, the lender lends its digital coins, being entitled to interest capable of increasing the amount of tokens in its possession over time.

 

Crypto loans see at their core not only the possibility of obtaining new resources through obtaining cryptocurrencies, but also in return specific rewards for those who disburse them, including money in fiat currency.

They are therefore aalternative in the traditional credit market, in which they give rise to multiple opportunities. Cryptocurrency lending has seen not insignificant success since its introduction.

The types of crypto lending

Cryptocurrency loans can be found declined in multiple types, exactly three:

  • Loans that see an exchange to obtain other cryptocurrencies. Serving as collateral are the applicant's own assets, which must present different virtual currencies from those required.
  • Loans in which you get fiat currency. Always acting as collateral is a specific amount of cryptocurrency.
  • Cryptocurrency loans in which you. get interest By virtue of dispensing cryptocurrency to third parties.

The common element in all three cases is that to obtain the loan is given in guaranteeing a package of cryptocurrencies: the protection through which cryptocurrency lending platforms protect themselves from possible risks.

 

How cryptocurrency loans work

Cryptocurrency loans can be obtained in two ways:

  • Social lending. The loan is made between individuals. The lender bears a percentage of the applicant's risk.
  • Speculative Lending. The entity that dispenses cryptocurrencies is a broker or platform.

The most common type is the second, proving to be undoubtedly the safest, since it has greater reliability.

The functioning of cryptocurrency lending, as we were able to describe in explaining what crypto lending is, is itself quite simple. Let us see what are the transitions:

  • A person takes out a loan and becomes borrower.
  • Deposit cryptocurrencies on the platform which will act as the collateral: the countervalue securing the debt.
  • An investor against what is arranged by the borrower lends his or her savings securing a annuity.

 

 

 

Therefore, there are several platforms specializing in cryptocurrency loans that offer facilitated practices, according to the steps we have described to you and making their services available to all those who wish to do so.

Crypto lending does not, therefore, work any differently from other bank loans, in which there is always some form of collateral that must be provided, either real estate or a portion of salary. Collateral is, after all, by its very nature the distinguishing feature of the different types of loans.

Cryptocurrency lending platforms merely act as intermediaries, as in any other financial transaction. The conditions to pay attention to when resorting to a cryptocurrency loan are as follows:

  • Loan countervalue. The value disbursed by the platform handling the loan. This can reach as high as 90% if the capital is requested in the form of fiat currency, which varies depending on the crypto involved at that particular time.
  • Ancillary costs. It is the operating costs: the lower they are, the cheaper the loan is.
  • Term of the loan. Each loan can be tailored to the person's needs. The collateral can be immobilized for a week, a month, a year, even a longer time. This element also affects the percentage of the loan's countervalue.

 

 

Advantages and disadvantages of crypto loans

We start with the Benefits that come with cryptocurrency loans, of which there are very many. In detail:

  • Simplicity of loan access, with protocols obtainable from any party with cryptocurrencies to bring in as collateral.
  • Less bureaucracy. No special supporting documents need to be provided, as is the case with traditional loans.
  • No fact-finding procedure toward the applicant.
  • Tokens in a stock state can be used in such a way as to accrue interest.
  • Cryptocurrency lending is a way to obtain fiat currency loans by having crypto as collateral, thus avoiding finding themselves pawning personal assets.

And the disadvantages? Most importantly, the borrower bears the risk of having to provide liquidity if the collateral is below the safety zone for the platform.

 

Another risk faced by the borrower is that of a possible cyber attack, coupled with the fact that, precisely because of their young age, cryptocurrency loans are considered riskier than those provided by traditional banks.

The disadvantages of cryptocurrencies need to be put into context, keeping in mind that crypto lending is an attractive product but on one condition: the choice of a platform able to ensure solutions in the name of reliability.

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