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Bitcoin Lending Explained
Many crypto enthusiasts store their assets safely until the price is right to move them. This is what’s called “HODL”, and it’s a valuable strategy given the volatility of the majority of cryptocurrencies.
However, you can use the funds collecting dust in your Bitcoin wallet by engaging in Bitcoin lending. Essentially, you can receive interest on your Bitcoin stash. Furthermore, you give other people a chance to utilise their digital assets by using them as collateral for a loan.
In the past couple of years, Bitcoin lending has been on a steady rise, and we want to tell you everything you need to know about it.
More About Bitcoin Lending
Many Bitcoin investors struggle with maintaining a steady cash flow. It often leads to raiding the capital they have tied up in assets for short-term costs. To get a better sense of how Bitcoin lending works, let’s use an example.
Imagine that you have three Bitcoin in your online Bitcoin wallet, and you don’t want to sell because you are reasonably confident that the price will soon go up. Also, if you offload your Bitcoin now, there’s a chance you won’t be able to buy as much as you want at a later date.
The solution is to use a Bitcoin lending platform. You can use your Bitcoins as collateral and receive a loan. Typically, that process involves “over collateralizing,” meaning that you’ll have to lock up more coins than the overall value of the loan you’re receiving.
When you pay back the loan plus the interest, you’ll get your collateralized coins back. Plus, if the price of Bitcoin went up, you’ll get extra profit. Naturally, this system works better for the lender than the borrower.
Bitcoin lending offers insurance to the lender should the price of Bitcoin suddenly plummet. But it’s a much riskier endeavour for the borrower, as most lending platforms require them to maintain the loan-to-value ratio.
The Two Types of Bitcoin Lending Platforms
The purpose of any crypto lending platform is to be a safe place where lenders and borrowers can collaborate efficiently.
The presence of the intermediary ensures that there are no irregularities in the process. There are two major types of crypto lending platforms, centralised and decentralised. Let us take a closer look at both.
Centralised Finance Crypto Lending (CeFi)
These are crypto lending platforms with a central authority that controls all systems and operations. A company or a group runs it, and it’s in charge of all management. This type of platform requires users to comply with KYC (Know Your Customer) procedure.
It’s a way to prevent money laundering activities and other types of financial crimes. These platforms use blockchain technology for all transactions and typically have 24/7 customer support.
Decentralised Finance Crypto Lending (DeFi)
Many Bitcoin investors are not onboard with CeFi and choose to sign up for a decentralised platform. It doesn’t have a central authority and is fully secured and monitored.
Codes handle everything. DeFi platforms rely on smart contracts to automate transactions and pay-outs.
Because transactions run on blockchain technology, they can be viewed by anyone in the network. This system provides more transparency.
Getting a loan is relatively simple. All you have to do is apply for the loan and send the coins, which will serve as the collateral. You don’t have to leave any personal information.
Advantages and Disadvantages of Bitcoin Lending
As with any type of lending, there are pros and cons to engaging in Bitcoin lending. One of the main selling points is that it’s accessible to everyone.
Also, your income doesn’t impact how much you can borrow. It’s a fully automated process, too, and doesn’t require much effort from either party.
There are downsides, however. Bitcoin price is volatile, which might result in you paying much more than you anticipated in the end.
Furthermore, some lending platforms will ask you to lock in your collateral for a specific amount of time which isn’t convenient for everyone.
Borrowing and Lending Bitcoin With Caution
Crypto lending is still in its early stages, but it has shown a lot of potential. Many Bitcoin users have great ideas about investment strategies but not the funds to see them through.
Borrowing coins at a relatively low rate provides a unique opportunity to see your stash grow in your Bitcoin wallet.
Those with significant assets already can seize the opportunity and make a few more by lending. It’s a win-win situation as long as the price of Bitcoin is stable.
Author Bio: Hitesh is a digital marketing strategist and entrepreneur with more than 15 years of experience in digital marketing, start-ups, branding, and customer acquisition strategies. Hitesh is the CEO and Founder of Reposition Group, which specialises in digital growth strategies for companies in the cryptocurrency market such as Bitamp.com.