May 23, 2023
There are many strategic tools traders use to increase their crypto gains, and one is crypto loans. As crypto becomes more accessible and present in various industries, investors are finding better ways to trade. Unlike other assets, crypto is in a unique category.
While it’s decentralized, cryptocurrency can also serve as collateral, just like stocks. With crypto loans, more people can join the market and engage in bigger positions. This means increased liquidity and profits. Whether you’re just starting out in the crypto space or are tenured with experience, crypto loans can add benefits. Here’s how you can use crypto loans in your trading safely and smartly.
Crypto loans are secure borrowed funds given to an investor by a broker or lending platform - like YouHodler - in exchange for collateral. Your lender will hold your crypto in return for their borrowed liquidity, while you maintain the loan fees. This is usually called your maintenance margin, or the percentage of the loan you’re obligated to repay each month.
If, at the end of the loan term, you’ve repaid the loan in full, you’ll receive your crypto back. You’ll also get to keep the profits you made from using the loan. If you default on your loan by not paying fees or releasing the funds, the lender will keep your collateral.
Interest rates vary on YouHodler from 0.0099% - 0.05% per day. This makes crypto loans far cheaper than their traditional counterpart. With credit card loans, for example, interest can run as high as 21% annually on average.
The amount of funds you can receive depends on how much crypto you pledge as collateral. Usually, traders receive anywhere from 50% to 97% of the crypto’s value. This is called the loan-to-value ratio (LTV).
Suggested reading: Loan to Value Ratio (LTV): What is it and Why it matters
If you pledge $10,000 worth of crypto holdings, for example, you could receive a $9,000 loan at 90% of the value. Loans can last as short as one week or as long as a year. The type of loan you receive will depend on your current crypto holding and trading strategy.
There are two main types of cryptocurrency finances, with loans that work differently.
Decentralized finance or DeFi platforms loan money from a blockchain application. True to their name, they aren’t connected to any third parties. Instead, loans and other transactions are done through smart contracts, which execute automatically. They’re made up of sophisticated code which keeps both parties’ information secure.
Then, the funds are transferred to the user’s crypto wallet, which has public and private keys. Instead of identifying information, these keys facilitate safe transactions. Ethereum is one popular example of a DeFi platform.
However, DeFi loans often have higher interest rates and are generally riskier due to the anonymous properties of DeFi exchanges.
Centralized finance loans are the more common option, operating as a regulated institution. These centralized companies hold large amounts of crypto on behalf of their depositors, keeping it secure. CeFi uses more traditional instruments and relies on third parties to regulate. YouHodler is one example,
CeFi also facilitates transfers of crypto to fiat currency, giving users more loan options. A CeFi also has the ability to protect users in case of a cyberattack by moving funds or pausing trades.
Receiving a crypto loan is a fairly simple process. Certain steps may depend on the type of loan, but the standard process has these general steps.
A crypto loan is useful for many purposes, from paying another debt to starting your own business. Similar to a personal loan, crypto loans don’t usually have strict restrictions from the lender. However, crypto lending is a great strategic tool for enhancing your trading gains, too. For example, you may already own a large amount of crypto and want better liquidity. A crypto loan can provide that without forcing you to sell your existing assets.
If you want to make some passive income, you can become a lender yourself. You can sign up on a lending platform and get a loan to buy more crypto. You can then deposit this crypto on platforms like YouHodler to earn interest.
Loans also make trading more accessible. Maybe you’re a beginner trader who wants to hold long positions or make bigger transactions. By using a crypto loan, you can do so without waiting to buy more crypto.
Crypto lending works pretty quickly. If you need funds in an emergency situation, crypto loans are a great strategy. You can even borrow funds for just minutes or hours at a time through flash loans.
Crypto lenders don’t need to check your credit scores to approve a loan. This means crypto loans are much more accessible to underbanked people, or those with difficult socioeconomic backgrounds.
You don’t need to state your intentions to apply for a crypto loan. Whether you want to use it for personal reasons or to trade, you can receive one. Plus - if one plan doesn’t work out, you can try a new strategy.
You can find many loan options with low-interest rates, making them more affordable. As long as you meet the minimum payments, your collateral is safe.
DeFi lenders aren’t well-regulated. They don’t offer the same protections to their users as centralized institutions, like banks, do.
When a trader misses an interest payment, or their collateral loses value, they risk a margin call. Margin calls are usually a request for the trader to deposit more collateral to make up for the lost value. If your holdings lose too much value during the loan, you may end up spending more
Crypto loans are a great way to use that crypto in your wallet instead of just HODLing. Don’t sell your crypto, but use it as collateral for access to quick cash. You can then use this cash for
Ultimately, crypto loans are another path to more liquidity and flexibility. YouHodler makes it easy to do. Just click the button below to get started.
Editor-in-Chief of the YouHodler blog. Connect with him about writing techniques, cryptocurrency, and music.
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