How do you get a fiat loan with cryptocurrency. Everything about the lending process. How do you can become a creditor and what are the risks. We will elaborate in this article.
The idea of borrowing in traditional currency against digital assets began almost immediately after the birth of cryptocurrency. And in 2012, these services began to appear. Due to the high volatility of the crypt, lending against such a pledge is considered the most appropriate option for preserving value and hedging price risks at a time when there is a “bear” market. The client gives the cryptocurrency, takes pleasure in it up to 70% of the average market price and pays monthly interest for using the fiat.
If the customer’s digital asset, which is in the bond, starts to grow, he can buy it back. If the value of the coin collapses, the customer can stop paying interest and forget about it. But as often happens, these sites do not often take shitcoin as a form of collateral.
Also, this kind of service allows you to get a quick fiat if you happen to need it suddenly, and you only have a cryptocurrency.
Such loans are issued with a guarantee and to anyone who wishes, as long as the client has a crypt. That’s because the service or the lender have absolutely no interest in your credit history, social status or financial standing.
See more about the terms and conditions of the loans, the interest rates and the risks associated with the use of these services.
The lending process
As was said at the beginning, cryptocurrency is a very volatile asset. Therefore, it is worth understanding that the full value of your cryptocurrency is not given by anyone, you can count on a maximum of 70% of the value, but it is good rather than bad. How credit, interest and repayments are calculated:
Opening a loan:
- BTC cost: $5 000
- The loan rate: 6% per annum
- The loan amount: $10 000
- Credit term: 240 days
- Discount: 40%
- Deposit: 5 BTC
- Initial cost of the deposit: $25 000
Closing the loan:
- BTC Price: $7,000
- Percentages: $394.5
- Refund amount: $10,350.
- The amount of the deposit that is returned: 5 BTC.
- Final value of the deposit: $35,000.
All of this leads to the conclusion that the borrower secured $10,000 at 5 BTC, with a return of $394.5 more, as well as the repayment of the bond, which increased in cash equivalent by as much as $10,000 over the course of the loan.
Thanks to this, the borrower was able not to exchange currency on the exchange and without losing on commissions to receive an impressive amount in fiat.
The service can determine the rates of “credit/deposit”, interest, credit amount and discount. It should be borne in mind that the collateral must exceed the credit, otherwise the creditor’s money will be exposed to risk. In addition to the special services that provide cryptic collateral, there are also p2p platforms and private investors. There are several differences:
- To get such a credit, you have to go through the user verification process. On p2p platforms, verification was not previously required, but last year such sites were extremely difficult to find.
- You have to be prepared for the fact that on p2p platforms you may not find the liquidity you need. There could be a lot of crypto on the platform in small quantities, and you, for example, need only bitcoin. Services do not have one dozen investors who provide their funds.
- The services often provide stablecoin, the same USDT, while p2p platforms have the ability to negotiate the right currency and mode of transaction.
- If the value of the collateral becomes like the sum of the loan due to the collapse of the cryptocurrency market, a margin demand will occur, thereby transferring the collateral to the service. The process involved with p2p platforms is discussed below.
The interest rate will depend on the service or the lender: the interest rate currently available on the market ranges from 8% to 16%. Of course, there is a chance that you can find a 2% or even a 25% rate. In turn, we recommend a discount of at least 30%, this percentage will greatly reduce the risk of a margin requirement, if it is possible to bet more than 30%, then bet. At the moment it is possible to find loan offers where discounts are only 5%. However, if you look at the crypto market in the last week of May 2021, the price of bitcoin ranges from $30,000 to $40,000. Now imagine that you took out a 5% discount loan – your deposit would have already passed the court.
It is also possible to insure the transaction when a sizable amount of credit is taken, where more than one creditor is also involved, the amount will increase, but the creditors themselves will not worry about their money. The higher the amount of credit, the more creditors involved, the number of creditors may be in the tens. The amount of the loan will depend on the rating of the borrower. It is as in traditional banks and lending, the better credit history, the higher the loan amount can offer.
In addition to special services and p2p platforms, the loan can be obtained on cryptocurrency exchanges such as Poloniex. But in this case, the only way to use the borrowed funds is directly on the exchange, and they cannot be withdrawn.
It should be noted that Russian citizens are less likely to approve such loans than residents of Europe or the United States. Out of 10 applications, 1-2 can be approved at best. Therefore, if you live in Russia and plan to take such a loan, it is best not to specify your place of residence or choose a service where you do not need verification.
Multising-wallet and its application in lending
Multising-wallet is a wallet with at least two cartoon signatures, without which entering or withdrawing money from a purse will not be available. This choice of purse work was first introduced to add an additional level of security for cryptocurrency holders. This increases the protection of digital assets. It looks like a smart contract where you have to fulfill one condition and then you have to fulfill the other. These purses are used by private lenders on p2p platforms.
Before issuing a loan, the lender and the borrower turn to the service of multising wallets. To open the purse, a pledge crypt must be kept, then three keys are created for the purse: one to the borrower, the second to the lender, and the third to the service. Although I can use two. When the loan is repaid, the borrower sends the application to withdraw, the service verifies the borrower’s application, if all goes well, two keys are entered and the funds are withdrawn. The same goes for the lender.
The advantage of this method is that if there are no two keys, nothing will happen with the assets in the account. But here’s the thing: if the guarantor who was chosen to lend the funds is not completely honest, he can negotiate with one of the parties to withdraw the funds for any reward. A lender may benefit by having a cryptocurrency with a discount of up to 50%, and a borrower may receive both money and digital assets. Therefore, before choosing a guarantor, you should look at services that have passed the test of time. They are unlikely to choose to tarnish their long-standing reputation for minimal profit.
The disadvantage of this method is the banal human factor. A person can lose a key, forget it, or just die, thereby taking the key with them. Based on this, we recommend that you use Multising-wallet to use the services of specialized services, there is usually a staff of employees and the keys are stored on the company servers.
If you want to become a lender
If you have a desire to become a lender, you need to take a few steps:
- Decide on the service to which you will provide your money for loans.
- You also need to find a service guarantor to use multising wallets.
- If you have impressive funds, then you need to take care of the options for insurance transactions.
What are the risks of private lending:
- There will be no guarantees. There have been cases when scammers took out small amounts of credit and quickly paid them off, thereby improving their rating of the borrower. Then, they found favorable conditions for large loans and simply disappeared. It also often happens that people pass identity verification using forged documents.
- We have already talked about the high volatility of digital assets, which can lead to losses.
Cryptocurrency lending is a dangerous activity for the lender as well as the borrower. The advantage of this process is that the credit system, in this direction, is not yet fully developed. And that means no clear interest rate, and if you look hard enough, you might find a good offer. And because of that, you can act as an intermediary, as ordinary banks do: borrow low-interest funds from the Central Bank and lend at significantly high interest rates to a borrower.
Because of the absence of a certain interest rate, creditors behave more freely. If the borrower has no choice, the lenders can lend at a high interest rate. In these situations, it is advisable to repay the loan quickly so as not to overpay the interest. Remember that lending is an additional way to hedge risk.
It turns out that crypto lending has both advantages and disadvantages. But even with its shortcomings, one can understand that the industry is growing rapidly and has potential in the future.