Already popular cryptocurrencies like Bitcoin and Ethereum have seen their total market capitalisation grow from the hundreds of billions into the trillions over the last few years. Despite the often-volatile nature of cryptocurrencies, new types of financial services offered in the crypto marketplace are grabbing the attention of many first-time crypto buyers.
One of the most interesting developments in the decentralised finance space is the expansion of crypto lending. Cryptocurrency holders can leverage their digital currencies as collateral for crypto loans without the need for credit checks and receive fiat money almost instantly.
Tony Lees is Global Head of Product at Wirex. He comments on the development of crypto and its increase in use cases:
“Crypto has come a long way since the creation of Bitcoin and can now offer a huge variety of use cases from overseas payments, to staking and lending and now, credit.”
In a similar way as traditional banks offer loans secured against a house or car, crypto-backed loans are secured against an applicant’s crypto holdings. A range of marketplaces, including Binance and Celsius, provide these innovative loans. All a user needs to do is select their loan amount, deposit their cryptocurrency as collateral and, once approved, receive the money.
A clear advantage of taking a crypto loan over a traditional loan is the fact that borrowers are not credit checked, so those applicants with either a poor or no credit history can still access the service. Also, unlike conventional financial institutions, crypto loans typically provide funds virtually instantly, instead of the days it can take from some other lenders.
As Tony comments, “Fast transaction speeds are a huge selling point when it comes to crypto, but this speed is also apparent when it comes to lines of credit. Unlike traditional secured loans, providing access to funds in stablecoins can be approved instantly, allowing users to leverage their digital assets as collateral, without the concern of selling off their holdings if the market has dropped.”
This form of loan may be particularly attractive to those people who hold a great deal of crypto currency and want the ability to immediately gain some fiat currency, without the need to sell the crypto holdings and pay taxes on them. In some cases, the interest rate offered through a crypto loan may be lower than a traditional loan.
It’s no secret that cryptocurrencies are far more volatile than other assets and can increase or decrease significantly in just a few hours or days. Depending on the loan to value rate, it is possible that the price of the crypto currency may fall below a pre-agreed figure set out by the lender which would then require the borrower to offer up more collateral to keep the loan.
In a scenario where the price of crypto currency falls from $50,000 to $25,000, borrowers may be expected to provide an additional $25,000 or face having to immediately repay the entire loan.
As cryptocurrency loans are not regulated, there is no guarantee that in the event of, for example, a security breach, borrowers would be protected and receive their cryptocurrency back.
Those with relatively small cryptocurrency portfolios may not be able to take out a loan due to high borrowing requirements. While the minimum loan amounts differ between lenders and platforms, some have minimum amounts of $10,000
Despite the risks posed by this innovative form of lending, the digital lending platform market is rapidly growing. According to data from Global Market Insights, the digital lending platform market is forecast to exceed $20 billion by 2027, driven in part by an increasingly welcoming regulatory environment and growing cryptocurrency adoption.
Tony finishes by emphasising the potential of crypto-based lending:
“As crypto continues to become more popular with mainstream users, secured crypto lending has the potential to open up the digital economy to a wider audience. The industry is continuing to innovate and demonstrating that crypto can offer benefits for virtually anyone, and crypto-backed credit lines could prove to be the big next step as we move towards mass adoption.”
The discussion continues at FTT Lending 3.0 on 30th March, where we will explore the benefits and risks associated with crypto-based lending, as we hear from some of the lenders who are leading the way.