Risks of cryptocurrency lending

Risks of cryptocurrency lending

Risks of cryptocurrency lending

Since its inception, the cryptocurrency market has grown rapidly. With hundreds of features, thousands of tokens, millions of investors, and billions of dollars, it is clear that the problems it solves are considered valuable for decentralization, anonymity, and cross-border payments. However, more and more users are interested in the question can bitcoin be loaned.

What is an unsecured cryptocurrency loan?

Cryptocurrency lending is the ability to borrow and lend crypto for a fee or interest. To get a loan and start investing right away, all you have to do is provide collateral through the DApp DeFi lending app or a cryptocurrency exchange. If the value of the collateral falls below a certain value, it will need to be topped up to avoid liquidation. After the loan is repaid with a fee, the collateral is returned to the borrower.

Collateral-free flash loans are also available to users and must be repaid in the same transaction. If the borrower is unable to do so, the loan transaction will be canceled before it is confirmed. Cryptocurrencies simplify and automate the borrowing and lending process. For many, it is an easy way to earn APY on held (HODL) crypto assets or take advantage of lucrative loans.

However, cryptocurrency lending, like any project, smart contract, or blockchain investment, comes with financial risks. For example, using volatile coins as collateral can lead to liquidation. Smart contracts, in turn, are susceptible to hacking and attack, which can lead to large losses for users.

What is cryptocurrency lending and how does it work?

Cryptocurrency lending is one of DeFi’s many features, and it is a worthy competitor to traditional means of lending. Instead of the well-known way of profiting from cryptocurrency, where you leave your tokens in your wallet until the price goes up. You can now lend your tokens for dividends through a process known as cryptocurrency lending.

Cryptocurrency lending is one of two areas of crypto financing. The other is borrowing in cryptocurrency. Similar to traditional banks, which allow you to use your assets as collateral to get a loan, cryptocurrency borrowing will allow you to use your tokens as collateral to get a loan in fiat or cryptocurrency.

However, unlike traditional methods, you don’t need any documentation or processing fees. Doesn’t that sound amazing? This way, you win by earning passive income. From a lender’s perspective, cryptocurrency financing helps you earn interest by giving you a platform to lend to institutional borrowers. The 7-17% appeal of cryptocurrency lending is far greater than the paltry interest of traditional banks on deposits.

Is it possible to get a cryptocurrency loan without collateral?

Yes, there are quite a few lenders that lend cryptocurrencies without collateral. Borrowers do not need to undergo credit checks or provide any assets as collateral. While collateral-free cryptocurrency loans may seem like a good deal, you should choose your lender carefully. Cryptocurrencies are decentralized, which also means that they are not heavily regulated, unlike traditional banks. This is why many scammers in the cryptocurrency lending industry can take advantage of your personal information if you provide it to the wrong lender.

Can I borrow cryptocurrency?

Yes, thanks to the massive proliferation of cryptocurrencies combined with the latest blockchain technology, you can now get cryptocurrency loans. One of the main advantages of cryptocurrency loans is that you don’t need a bank account or credit history to get such a loan. Moreover, it is possible to get a cryptocurrency loan without collateral. However, in this latter case, be very careful about the lender. Do your research and be careful not to apply for a loan from fraudulent projects.

The most popular coins

This is how we can conventionally label those coins that you learn about most often in the news. Every year, financial publications release selections of promising digital currencies, in which you can invest at the start, and earn on the growth of popularity. How it works: Blockchain-based projects release their coins to gain additional support from users. Investors look at the most promising lists, buy at low prices and sell after they rise.

Even relatively stable cryptocurrencies sometimes fluctuate by as much as 50% per day. Investing in any one cryptocurrency, even the most reliable one, is very risky. It is best to study cryptocurrency rankings: focus your investments on top-10 or at least top-100 rated coins. Before investing in new digital currencies, it is important to properly form and diversify your crypto portfolio.

You can trace how tokens with a big name have just as loudly failed with concrete examples. At the end of 2021, Curve Dao Token was written about as a “promising” currency to invest in: at the end of January to June of the following year, the token fell in price from $6.8 to $0.5. The same thing happened with other news currencies like Polygon, Terra, and Stacks.

  • Why invest in it: the opportunity to make quick money on popular tokens, increased sense of self-importance by investing in a popular currency
  • Cons: need to keep track of rapidly changing rates and popular tokens that appear, high risk of losing money because of sharp declines or getting into a fraudulent project
  • Recommendation: dedicate not more than 5% of your crypto portfolio to HFT, ICO, NFT, and “HYIP codes” in total.

DeFi tools

DeFi is a blockchain-based financial service and application. Thanks to these services, users can earn passive income from cryptocurrency assets, arrange loans, and deposits and save on fees for transfers between countries.

The rapid growth in the popularity of decentralized instruments occurred in 2020. Among them: Uniswap and SushiSwap exchanges, MakerDAO and InstaDApp loan platforms, as well as Harbour and Polymath services for issuing share tokens. The main task of the authors of such services is to create an alternative to the current financial system using open-source protocols.

Types of cryptocurrency exchanges: which one to choose?

Exchanges mainly differ in one parameter – centralization. There are three types of cryptocurrency exchanges:

  • Traditional, or centralized (CEX)
  • Decentralized (DEX)
  • Peer-to-peer (p2p).

Let’s see how they differ. The main difference is where users’ cryptocurrency is stored.

What is a centralized exchange?

In a centralized exchange, all users’ money is stored on the exchange itself. Such an exchange has access to your money – with all the associated risks and possible bonuses. A centralized exchange is similar to a usual bank: If you want to buy dollars at the bank, you first put the money into the bank account, and then convert them into dollars. Then you take it out of the bank at a cash register or ATM.

To start trading on a centralized exchange, you have to deposit some funds, and then you can begin trading. You can fund your account at centralized exchanges by card-to-card transfer, PayPal, or cash at exchange offices. The main advantage of a centralized exchange is that you can go there with fiat (real) money, and buy a cryptocurrency for it. In decentralized exchanges, you can only exchange cryptocurrencies.


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