Cryptocurrency Loan: How they work, the Risk, and the Workings

Cryptocurrency loans are different from the usual trading where you buy Ethereum or other coins for resell. Here, it is a bit different, it is just like every other type of loan where you pledge a property, so you can be eligible for some financing. That type of loan you get either from the bank or any other financial institution.

But unlike those traditional lending methods, your cryptocurrency coin is the assets meant to be exchanged for the cash that you are expected to be paying back on an instalment basis. Should the debtor fail to pay back these loans, the lenders will proceed to cash out the cryptocurrency they have presented as collateral.

There are many cryptocurrency companies out there where people can buy Ethereum, and also go for crypto loans, and with a pretty good rate too. For example, a company like Bitvavo.com charge as low as 0.25% in trading fees, while their coin prices are equivalent to what you have in the international market e.g., BTC is currently sold for $63.852,85, and allows up to 150 digital assets which interested persons can pledge.

Interestingly, people are gradually coming to terms that cryptocurrency has gone beyond a situation where people just buy Ethereum or Bitcoin for resell, it is gradually creating more businesses, building industries of its own, and exchange platforms is one of many examples of how much it has transformed the financial industry as we know it.

Pros of Cryptocurrency Loans

There are many advantages of going for cryptocurrency loans, some of them include:

  • No tedious verification procedure. There won’t be a need to go through any kind of credit check, just like the traditional bankers always like to go through. This is a plus for prospective borrowers who don’t have a great credit history.
  • With a cryptocurrency loan, you won’t have to sell your assets (coins) before getting it back. This is to say in essence that should the assets appreciate during the time you are holding the money; you will still get it back at the current appreciated rate. This is to say, that crypto loans let you borrow against your main balance while getting paid back with accumulated interest.
  • With cryptocurrency loans, funds are distributed faster. This is unlike in the traditional banking system, where you have to wait for days to get the funds. In most cases, some crypto loan companies even distribute funds faster than the others. But note, that the amount you will be getting will be based on the current value of your assets. On some platforms, you can borrow up to 50% of your current value.

Problems Associated with Cryptocurrency Loans

  • Just like in a situation where you buy Ethereum and the price suddenly starts depreciating. In this case, to go for cryptocurrency loans will require that you increase your assets to measure up with the amount you wish to borrow. In most cases, lenders sell customers’ assets as a way to reduce their loan-to-value ratio. Let’s cite a practical example: should you take a $2000 loan with $3000 cryptocurrency assets as your pledge, the loan-to-value ratio here would be 50%. And if, unfortunately, the value of the coin decreases by (say…) $1000, the leading company may need you to pledge yet another $1000 in crypto assets.
  • Depending on the cryptocurrency loan company you signed up with, some of them might not even be eligible to conduct such an operation. This will warrant that you convert your digital assets into another type of asset before you can be eligible for the loan. Again, they won’t allow you access to your assets until you pay off the loan balance. This, in essence, means that you won’t be able to trade your coins as fast as you’d wished to.
  • They are not insured. Because cryptocurrency loan companies are not federally insured, it is not sure if you will get compensated in case of any eventuality, e.g. a likely security breach.

Note:

That cryptocurrency is an extremely volatile industry, and the idea of a cryptocurrency loan company is entirely new. With this, nobody seems to understand the specific charges, including the tax implication of trading on some of these platforms. Nevertheless, while some other companies may display their charges, there are other platforms where people go to buy Ethereum and other cryptocurrencies that remain adamant about this fact.

Finally, we’d also advise that you go for a reputable company when looking for a good cryptocurrency loan company. Again, in as much as the cryptocurrency loan companies are not federally recognized, their reputation over the years still speaks for them – all you need to do is to recognize the right company.

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