Crypto Lending as an Alternative to Trading

Oct 11, 2022
Crypto lending vs. crypto trading

The cryptocurrency market is evolving, and more advanced trading tools are being rolled out. One such tool is crypto loans. . On these crypto loan platforms, crypto traders can participate in more unique ways.  Until recently, all traders had to use platforms like Binance or Coinbase to engage with the crypto market. 

They could only make cryptocurrency exchanges (or trades) with their own assets. This makes it more difficult for people with fewer funds to engage in the market properly. It also makes maximizing profits and working your way up to bigger investments harder. However, crypto lending solutions solve this issue by offering an “all-in-one” experience. By helping to efficiently acquire multiple loans, these services enable traders to quickly multiply their assets in an easier way than margin trading. 

In this article, we'll show you how crypto lending is a viable alternative to trading in addition to recommending top crypto lending platforms.

What is crypto lending?

Crypto lending is an increasingly popular cryptocurrency investing and trading tool. It’s a way for traders to buy crypto with liquid funds without selling their other assets.  With this strategy, traders and investors use “borrowed” capital to grow the potential return on their investment. Their existing cryptocurrency assets or their personal funds are used as collateral for the loan. 

This allows traders to avoid crypto tax rates on their short-term gains, and invest more in crypto that they expect to increase in value. Their profits are maximized; they can pay off the loan and still walk away with a larger reward. 

During bear markets, crypto-backed loans can save your account funds. A bear market occurs when a market goes through a long period of price declines. It can cripple entire investments by more than 99% in the crypto market.  Economic recessions, depressions, or lack of growth prospects can cause bear markets. Yet, in these difficult times, traders can use crypto loans for effective short selling, creating opportunities out of a volatile market.

Crypto loans vs. margin trading

Trading with crypto loans is not the same as margin trading. A margin is also a loan, but it operates differently from crypto-backed loans. With a margin, you borrow to trade for or invest in a certain crypto asset pair. You can also borrow more than what is in your account, but this comes with the disadvantage of fluctuating interest rates. 

A crypto-backed loan is more manageable and simultaneously flexible. It isn’t a huge sum (more than what is in your account), has defined and static terms, and can be used for several purposes. 

Using this method, an investor could receive significantly more profit than holding traditional stock shares or cryptocurrency assets. In the crypto market, you could theoretically do this with a traditional bank loan and a cryptocurrency exchange. However, finding top crypto lending platforms is a better alternative as it allows you to buy, sell, trade, and lend all in one place. 

Suggested reading: What is Margin Trading?

Types of Crypto-Backed Loans

Crypto-backed loans can be categorized into two types. 

Centralized Finance Loans (CeFi)

Centralized finance loans are also called custodial loans. In this case, a central authority or entity will hold custody of the collateral for the borrowed funds. The trader will give full access to the private keys of their assets, and the loaner will enforce the loan’s terms. 

This type of loan is better for beginner crypto users, as it’s simple to use and doesn’t require as much management. There is also more trust between the loaner and the borrower. Custodial loans make up the majority of crypto-backed loans.

Decentralized Finance Loans (DeFi)

Also called non-custodial loans, DeFi loans operate through a smart contract instead of a central entity. Instead of fiat currency, the borrowed funds will be in stablecoins that can be exchanged later. 

Since the smart contract enforces the loan’s terms, the trader also gets to keep control of their assets. However, the trader will have to manage their assets more carefully. DeFi loans also usually have higher interest rates. 

Suggested Reading: What is Decentralized Finance: The Ultimate Guide

Crypto lending strategy to multiply your crypto

Crypto lending platforms let users buy, sell and convert crypto. They can also receive crypto-backed loans all in one, convenient location. Unlike seeking a loan at a traditional bank, there are no extensive background checks to request a loan. In minutes, users can sign up, pass KYC and receive instant cryptocurrency loans. Furthermore, users can connect their personal credit/debit card to the platform, allowing them to buy crypto with credit cards and directly withdraw fiat funds.

Let’s look at a real-life example of how a trader using crypto-backed loans works, as opposed to margin trading. 

Step 1: Purchase the crypto

First, a trader goes to a crypto loan provider and determines what crypto they want. Using their debit/credit card, bank wire, or stablecoins like USDT or USDC, they can buy some of the available cryptos. There are many options, like BTC, BNB, ETH, ADA, XRP, SOL, DOGE, DOT, MATIC, TRX, AVAX, and more. ,

Step 2: Use crypto as collateral

The trader can use this cryptocurrency as collateral for a loan in fiat currency (like USD, EUR, GBP, CHF) or in stablecoins. 

Step 3: Put your loan to work

With your extra collateral, you can purchase more crypto. Wait for it to reach your value appreciation goal, at which point you can sell and grab your returns!

Step 4: Repeat

Follow Steps 2-3 until you’re satisfied with the profit you’ve made! To use 

By combining multiple loans, the borrower leverages their original collateral amount to drastically increase their return on investment. This is not possible on crypto exchanges without margin trading tools since they do not offer the ability to acquire crypto-backed loans. 

Crypto-backed loan platforms are not just a place to get money without selling your crypto. They are creative tools that can help users buy, sell, hedge, and utilize their crypto portfolio for maximum growth. 

Crypto lending risks

While crypto loans have huge potential benefits, traders should also be aware of their risks. Risk management should be an important part of your trading strategy as with any monetary investment. 

Risk of Technical Failure

Experts agree that this risk is a small one. This happens in the event that the digital platform or smart contract you used is hacked or breaks down. Another technical failure could include losing an Internet connection for a prolonged period of time.

Margin Calls

Margin calls are a call to action for a trader when the loan isn’t managed properly. They can also happen if the market is losing too much liquidity. If a cryptocurrency drops too low, the platform might forcefully liquidate to keep it stable.

Forced Liquidation

A market in crisis isn’t the only scenario where the lender forcefully liquidates funds. If a trader doesn’t pay back the loan or loan fees (which act as tax) on time, the lender will take action. The fees depend on the interest rate, which could be anywhere from 1% to 12%.

Note: Using loans to buy more assets does not guarantee profits. Before taking part in such behavior, make sure you understand the risks that are involved in lending and margin trading before proceeding.

What are the top crypto lending platforms?

There are a wealth of crypto lending platforms out there to choose from. Choose wisely though. Not all are created with a user experience in mind. A good crypto lending platform should have the following traits:

  • High-level of security
  • User-friendly
  • Good lending rates
  • High loan-to-value ratio
  • Multiple loan options
  • Instant access to cash
  • Plenty of collateral options
  • Regulated and compliant with laws
  • A transparent team structure
  • Multiple features in addition to crypto loans
  • Easy deposit and withdrawal options
  • 24/7 access to customer support

YouHodler has all the above traits – and more. YouHodler is a multi-faceted FinTech experience. Not only does it offer the best crypto lending feature on the market, but has additional features to help you multiply, earn and trade cryptocurrency. 

YouHodler is fully regulated in Switzerland and compliant with the EU. So before you do research on the top crypto lending platforms, let us save you some time. Click the button below to get an instant loan from YouHodler and explore our suite of advanced features.

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