Since the issuance of the first cryptocurrency (Bitcoin), the crypto industry has been intended to disrupt the conventional bank system. Originally, it was suggested that Bitcoin and other virtual assets would replace cash payments. However, as the technology has developed, so has its use as a commodity, and cryptocurrency has grown to become a competitor of the conventional finance system.
Today, conventional investors show grown interest in the crypto industry and the opportunities it offers. Of all the financial instruments developed around virtual assets over the last several years, cryptocurrency lending is the one that has the potential to attract more conventional investors and more money to the cryptocurrency market.
It all started with the Bitcoin loans. However, as more blockchains were developed, crypto lending was improved to include additional assets and give more freedom to cryptocurrency investors. The market capitalization of all cryptocurrencies has multiplied over the last year, attracting considerable attention (and therefore, more money) to the market. Cryptocurrency lending can upset the crypto industry and, consequently, the conventional financial market.
What You Should Know About Crypto Lending
Crypto lending means borrowing or lending money against cryptocurrency. Users can take a loan in just a few minutes. In addition, this loan provides more flexibility, as you can pay it back at any moment using any supported cryptocurrency with no fee.
The majority of crypto lending platforms allow you to create interest accounts to gain interest on cryptocurrency and crypto loans. Almost all crypto-backed loans are collateralized: instead of carrying out a credit check, they permit borrowers to obtain a loan immediately.
What’s the Difference Between Decentralized and Centralized Lending?
Crypto lending allows you to hold virtual assets while earning additional money for trading or other goals. There are two ways to obtain a crypto loan: centralized (CeFi) and decentralized (DeFi). Each of them has strengths and weaknesses.
What Is Decentralized Lending?
Decentralized lending platforms rely only on algorithms. They use lending protocols that can be either open-source or invented by the project’s staff. These platforms totally exclude human involvement, due to which they can provide lower annual percentage rates and upfront fees. Nevertheless, we all make mistakes – customers can push the wrong button, give the wrong crypto address, etc. Unluckily, decentralized lending platforms don’t tolerate mistakes.
In the majority of cases, they don’t keep users informed of the changes in the cryptocurrency market. Therefore, some clients can lose their assets, which makes decentralized lending risky for beginners. However, users don’t have to pass the registration, which allows you to stay anonymous while obtaining loans or conducting any types of transactions.
Benefits of Centralized Lending
Unlike decentralized lending, centralized lending has its advantages. Centralized lending platforms group of workers monitoring every operation within the ecosystem. In case a client makes a mistake, client support can always help and, in certain circumstances, even offer a refund. But, since centralized lending platforms employ staff to support the clients, conducting transactions can be quite expensive. For this reason, annual percentage rates are higher in comparison with decentralized platforms. Moreover, centralized lending platforms demand registration. Clients must present their identity documents and, in certain circumstances, POA (for instance, power bill). Therefore, borrowers are deprived of their anonymity, which makes each transaction transparent to the company’s staff.
Influence of Crypto Lending on the Cryptocurrency Market
Selling and owning cryptocurrency are the most traditional methods to profit from virtual assets. However, the growing popularity of cryptocurrency lending platforms over the past several years has created a new way to make more money from your cryptocurrency. Below are several ways how cryptocurrency lending can impair the normal functioning of the market:
Enhanced Assets’ Flexibility
An ability to borrow against crypto you’re owning provides cryptocurrency investors with greater flexibility as regards their assets. If you want to buy a specific cryptocurrency and wait for its price to increase, we recommend you to make a deposit to a crypto platform and receive interest. If you prefer going short, cryptocurrency loans can free up the assets you’re owning and permit you to sell the borrowed crypto.
This approach adds additional instruments to the cryptocurrency investing arsenal. Users can make passive income on the assets they don’t want to trade. In addition, the majority of cryptocurrency lending platforms allow you to cash out your crypto with no additional efforts and money. While owning digital assets doesn’t open any scope for arbitration, cryptocurrency loans provide investors with an opportunity to increase liquidity having to sell their assets.
One of the main advantages of crypto lending are high rates for staking. Due to the borrowing protocols, top crypto lending platforms provide up to 10% APY if you stake your digital assets in a liquidity pool. This rate is way higher in comparison with what you can obtain for depositing fiat funds to a savings account administered by a conventional bank. In addition, loan repayment rates are very low as the loan is securities-based.
Making Entrance Barrier Easier
Crypto P2P lending connects borrowers to creditors without intermediaries. You don’t have to wait long for a loan, as collateralized crypto lending accelerates this process. In addition, collateralization allows you to avoid prolonged credit checks: no credit rating or record is required to obtain crypto loans. This is a perfect option for those who need to obtain immediate loans without long and tedious procedure of credit checks.
Crypto lending allows the investors to handle their assets freely. High annual percentage yield puts your assets to a better and more productive use. Together with an easy entrance barrier, these factors make cryptocurrency loans appealing to both Bitcoin and conventional investors. With an increasing popularity of virtual assets, crypto lending could destroy the market balance by attracting extra investors and, therefore, extra money to the cryptocurrency market.
Conventional bank credits are much more difficult than crypto loans, which means that the quicker and more effective process could attract traditional investors to the crypto market. Crypto lending has already made great progress. Today, it let you to make huge profits from your cryptocurrency due to a rush of new investors into the market.