Business General

Different Types of Crypto-Backed Loans and How It Works

The crypto world is growing rapidly. Bitcoin was the first crypto to get publicly introduced but soon the landscape saw an array including Ethereum, Litecoin, Monero, and more. Crypto assets and currency are increasing in its popularity and credibility over the traditional financial system.

Even though people are investing in digital money, it is still not a widely accepted payment mode. However, businesses are slowly adopting it. Some leading brands that accept crypto payments are Shopify, Overstock, and Expedia.

In terms of assets, crypto has been showing a promising development when compared to cryptocurrency. This is the main reason that miners, traders, and investors are keeping their crypto assets. In an emergency, they use crypto assets as collateral to raise a loan.

Reasons crypto-backed loans are gaining popularity

If businesses or individuals need instant cash can crypto-backed loan help? Obviously, crypto loans help both businesses and retail investors to fulfill their instant cash needs. Moreover, they don’t have to lose their crypto-asset ownership.

The majority of crypto investors create a long-term investment goal. They don’t desire to sell their crypto assets in near future but due to the need for instant cash, they are forced to get rid of their long-term crypto investment portfolio.

Fortunately, crypto-backed loans can be helpful. Crypto-backed loans are getting popular because –

  • Investors don’t desire to sell their crypto-asset.
  • Investors can gain funds in crypto or funds [suitable for their needs].
  • Investors can use them as collateral or security.
  • Investors don’t have to be concerned about their credit score history.

Besides, crypto-backed loans are –

  • Instant
  • Transparent
  • Fulfill different financial needs

In comparison to regular bank/financial institution loans, a crypto-backed loan is a better alternative for investors.

Different kinds of crypto loans

Interest-only loan – Borrower pays the monthly interest and the principal is paid during the expiry of loan. It is a great option for freelancers, start-ups, or SMBs because their businesses are still not profitable, so there is indecision about cash flow.

Amortized loan – Leverage is a great investment strategy, where the borrower uses borrowed capital for increasing their potential ROI.

How BTC-based crypto loan works?

Collateralized lending for the cryptocurrency is offered on many platforms like bitcoindealers.com. A borrower starts a protocol and sends a request with details of principal amount and interest rates.

Long or short-term loans can be borrowed but ensure to get a great interest rate. 60% of crypto value can be borrowed. The loan can be kept for as much as you need but there will be a need to pay monthly fees. Whenever you are prepared to pay back the loan, then you can get your BTC back.

Lenders store your BTC collateral in cold storage. If BTC price drops, you get a margin call. Top your collateral or the lender will sell your BTC to cover their losses due to price fall.

When the allocated time for debt repayment passes, the loan agreement triggers two actions –

  1. A borrower repays the total loan amount and gets the collateralized token back.

Or

  1. In case of default, the contract transfers token to the lending service.

Smartly leverage your crypto!

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