Unlocking the Value of Digital Currencies with Crypto-Backed Loans
Researcher and writer interested in new technologies that contribute to the social good
Currently, the value of all the bitcoin in the world is $154 billion. And, bitcoin is only the most well-known cryptocurrency in the global economy. If we combine the value of bitcoin with other cryptocurrencies with a market cap of at least $1 billion, such as ethereum, litecoin and ripple, the total value comes to approximately $210 billion.
Financially speaking, this value is under-leveraged. Unlike conventional assets, cryptocurrencies are not integrated into the mainstream financial system and can't be used as collateral for loans and other financial
instruments. The value of cryptocurrencies remains mostly untapped.
Several enterprises have identified this untapped potential and have developed services that let individuals and businesses use cryptocurrencies as collateral for loans. This article focuses on one of the
newest entrants to the crypto-backed loans section: Bankera Loans
But, regardless of which crypto-lending platform you choose, there are a few key elements to consider in looking at crypto-backed loans.
What is a Crypto-Backed Loan?
To receive funds through traditional loan borrowers have to provide an asset of value to back it up. This is known as collateral. Borrowers risk to losing their collateral if they default on loan payments. A crypto-backed loan is the same except it lets borrowers use cryptocurrency holdings as collateral, rather than a home or business.
Why are Crypto-Backed Loans Useful?
Crypto-backed loans are an option for people who want to use the value of their cryptocurrency holdings without selling any. This could be because they think cryptocurrencies will increase in value in the future. With a loan collaterized with cryptocurrency, it is possible to access the value of one's holdings without liquidating them.
Crypto loans are also very flexible. There are options for individuals looking for microloans, as well as companies looking for significant financing. While several services offer substantial credit limits for enterprise customers, Bankera Loans offers the lowest minimum borrowing amounts in the industry, starting at just 25 EUR. These small crypto loans could be an option for those living in countries where regular financing is difficult to get or interest rates are high.
Finally, crypto-backed loans could also be used by traders to fund cryptocurrency purchases they can profit from through trading.
Key Considerations for Crypto-Backed Loans
The size of a crypto-backed loan depends on the value of the cryptocurrencies put up as collateral. The exact amount of collateral an individual must provide is determined by something called the loan-to-value
(LTV) ratio. This can be anywhere from 25%-90% of the value of the collateral.
As with any loan, the borrower of a crypto-backed loan pays interest to keep the collateral intact until the loan matures. However, repayment options can be extremely flexible because blockchain technology is able to ensure the collateral is liquidated in case of default. Bankera Loans, for example, has no repayment schedule at all. A loan can be repaid whenever and however as long as the full amount is back before the end of the term.
The length of crypto-backed loans can vary quite a bit, with some lenders offering maximum terms of only 60 days. Bankera Loans range from 1 to 24 months
Annual Percentage Rate (APR) is the annual cost of borrowing after including all fees. This number is based on the amount borrowed, fees charged by the lender, and length of the loan.
Some lending services are not as transparent as they could be about the total cost of their loans and may charge hidden fees. Bankera Loans is to be commended in this regard as it states all its fees explicitly upfront.
Most crypto-backed loans can be withdrawn in both fiat and cryptocurrencies. Some lending platforms have options for offsetting interest payments by using a native token. For example, Bankera Loans gives BNK holders the option to get lower interest rates by using BNK as a currency for interest payments.
Crypto-Backed Loans Do Not Impact Credit
Traditional lenders pull a credit report when processing a loan application. When a lender does this it causes a temporary drop in the applicant's credit score
This is why it is not good to apply for multiple loans in a short period of time. But with crypto-backed loans, the underlying technology can guarantee repayment using transparent transaction verification, smart contracts, etc.
This means a lender like Bankera Loans
doesn't have to pull credit reports.
Crypto-Backed Loans Are Risky
Crypto-backs loans are risky because the value of cryptocurrencies can be extremely volatile. If the price of a cryptocurrency decreases over the period of a loan, it shouldn't be used as collateral.
If the value falls, you will either have to repay a part of the loan or increase the collateral.
However, since it is impossible to predict the price of cryptocurrencies, the risk of a drop in collateral value with crypto-backed loans should not be ignored.
Follow me on Twitter and Medium if you would like to learn more about blockchain and cryptocurrency .
If you have any questions about this article, please comment in the section below!
Subscribe to get your daily round-up of top tech stories!