How to lend Bitcoin?
There are many methods by which one can make money from digital assets. The most popular cryptocurrency that is invested in and traded is Bitcoin because it is considered to be the most secure. If you want to get the most out of your assets, then you need to choose a Bitcoin loan website. Crypto loans will allow you to take advantage of all the income opportunities. Here you will learn how to borrow Bitcoin.
What is crypto lending?
The crypto lending mechanism is useful for those who need a financial exchange without actually selling the purchased cryptocurrency and are able to cover the amount taken in the near future.
In cryptocurrency lending, one participant lends another cryptocurrency (e.g., Bitcoin) in exchange for interest. This mechanism resembles regular lending: someone needs a certain currency, so the other lends it (often a bank plays this role). But in the case of crypto, there are some differences.
For example, cryptocurrencies are not handled by banks. Instead, centralized CeFi exchanges (such as CoinRabbit), or decentralized funding protocols (Defi) such as AAVE, allow crypto loans in exchange for interest. The percentage at which you can take a loan can be as low as 1%, but usually, it’s 10-20%.
How Bitcoin lending works
A formal middleman is not necessary for managing loans made using cryptocurrencies. Instead, smart contracts automate the whole procedure, including predetermined prices and repayment terms. Another distinction is the absence of registration requirements with any regulatory or governmental bodies for lending your cryptocurrency.
When you take out a Bitcoin loan, you will need to provide quite large collateral. The platforms require this amount of collateral because the loan itself does not require approval. Even on many centralized marketplaces, you are not required to go through the KYC – “know your customer” procedure. This is convenient for the borrower because you can borrow quickly without providing personal information, but he must give a guarantee to the platform that he will repay the loan, or the collateral will be deducted instead.
The amount of collateral depends on the loan-to-value ratio. The LTV ratio is the amount of credit in relation to the value of the assets securing the credit. The basic formula for this concept is the amount of money borrowed and the interest rate divided by the market price of the asset securing it. Once the loan-to-value ratio is calculated, the risk ratio is determined, which shows the probability of irreversible loss of the deposited asset. The tipping point begins at about seventy percent, when a margin call is made as a warning to increase the collateral to balance the loan or to cover the amount of the loan, and once the critical number (usually 85%) is reached, all deposited tokens are fully accepted by the platform. This mechanism ensures that the user keeps track of the status of the loan if they do not want to lose monetized assets.
What is the point of Bitcoin lending?
The advantage of crypto loans is obvious — you have an asset that you are not going to use, but right now you need Bitcoin. For example, to start trading on the exchange. So you leave the currency you don’t intend to use in the near future as collateral on the crypto lending platform. While you make transactions with Bitcoin, the currency left in pledge continues to change at exchange rates. This means you may end up withdrawing more money than you left behind.
Another option of cryptocurrency is instant loans, which allow you to borrow huge amounts of liquidity without any collateral — but only within a single block.
If you are looking for a reliable site where you can borrow Bitcoin, try CoinRabbit.
Is it safe to take out a Bitcoin loan?
Since the lending platforms do not need to provide information about themselves, it begs the question — can they be trusted? CeFi-platforms are more trustworthy because they are centralized. Also, you can always check what certificates of protection the site uses, whether it uses a system of cold wallets, and what partners it cooperates with.
Taking Bitcoin on lending platforms is profitable if you trade in cryptocurrency. By pledging another asset on favorable terms, you get Bitcoin and can use it for your own purposes. All you have to do is choose a reliable platform and you’re good to go.