If you have an interest in cryptocurrency, you know that there are many ways to make your crypto investment work for you. There are traditional forms of making money by buying or selling currency, of course, but there are also some more advanced strategies that may be appropriate for your portfolio. One such example is crypto lending.
What is crypto lending?
Though the process can be somewhat complicated, the definition is not. Crypto lending is literally loaning someone cryptocurrency. That individual will then make repayments on a pre-agreed schedule. They will also repay the original value of the loan with interest. This means that the originator of the loan will be able to turn a profit on their original investment.
An example of a crypto lending platform is Hodlnaut, where users can earn up to 10.5% on their crypto by lending to vetted institutions. Hodlnaut applies stringent capital requirements for their borrowers by only lending to institutions that borrow less than 1x of their Net Asset Value, minimizing the risk of default. In the worst-case scenario where default happens, Hodlnaut would take on the loss and pay users from their equity funds.
There are many challenges here, including the fact that the value of cryptocurrencies can fluctuate wildly. This can make lending more complicated.
How does it work?
According to the crypto experts at SoFi, “For most cryptocurrency loans, the lender isn’t a bank, but another individual investor. That means an individual can either be a cryptocurrency borrower or lender.” These loans can occur in any form of cryptocurrency, so lenders can get involved in a wide array of crypto lending, like bitcoin lending. In crypto lending, an individual will put up an asset as collateral for the loan. This way, if they default, they will lose their collateral. The loan terms will be agreed to, including interest and repayment schedule. A third-party app or organization will typically manage this process and ensure that payments are being made on time. They will also usually manage the collections process if someone defaults on a loan.
It is also worth noting that the interest rates here can be very expensive, often much higher than other forms of interest rates.
How can you do it?
Typically, these loans do not work the way that normal lending works. This means that they aren’t done via contracts or in a bank office. Instead, people who want to get involved with crypto lending can do so via a variety of apps or services. These apps allow users to lend out their crypto assets to others and automate the repayment process. They also can manage collections and ensure that a user has put up enough collateral for the purposes of a loan.
Of course, these services don’t do these loans for free: They will typically take a percentage of the loan and/or charge a flat fee as payment. This, of course, can eat into the profit of an investor. As such, you have to select the appropriate service in order to ensure that your financial needs are being managed, but that you aren’t losing too much money in the process.
Nothing in the investment world is risk-free, and crypto lending certainly has its pitfalls. However, for crypto owners who have the capital and are interested in taking their investment portfolio to the next level, crypto lending may be a perfect way of growing their investment.