There are at least a dozen distinct ways of making real money using cryptocurrency. Lending cryptocurrency to other parties is one of the most effective methods of making real money using your crypto coins.
Bitcoin, one of the leading cryptocurrencies currently, rose in value by 6.5% at the end of September 2022. Although other coins shed massive amounts of their value, they will likely gain in the short term.
When the value of cryptos rises, it becomes easy to make money via lending to willing borrowers. But this approach is full of risks and opportunities. For example, you must compare best lending platforms before settling on one. Read on to learn how to make money via lending cryptocurrencies.
The Basics of Lending Cryptos
Cryptocurrencies operate on the concept of Decentralized Finance. There is not any single central authority that controls cryptocurrencies. This feature offers massive opportunities as well as risks. Crypto lending is one of the key services that emerge from the decentralized nature of cryptos.
In cryptocurrency loans, a borrower can gain access to cryptos without buying them. The cryptos are in the hands of a third party or the lending website. The lending website obtains the cryptos that it leases out from investors. The investors are individuals who own cryptocurrency and would like to make money from their coins.
Crypto loans are beneficial to all three parties involved. The lender of the coins gets to make real money without losing their coins. The lending platform also makes money because it charges a high interest to the borrowers.
The interest that the borrowers pay to the lending platforms is the annual percentage yield. The lending websites then take a cut from the interest and pass the rest to the owners of the coins of the real lenders.
How Cryptocurrency Loans Work
Cryptocurrency lending works like normal bank lending. However, there are subtle differences between bank lending and cryptocurrency loans. The lending websites decide what the interest rates will be. For ordinary banks, the central bank decides the interest rates that the banks use.
The interest rates are not uniform. The rates vary from one coin to another or even across the intermediary platforms. So, a borrower must take time to compare the interest rates that different platforms charge before selecting the best one.
People may borrow cryptocurrency for assorted reasons. The main one is that they intend to use the coins as collateral to obtain real money as another loan. Thus, it makes sense for the borrower to ensure they can pay the interest to the crypto lending platform and the real money lender.
The most recent innovation in cryptocurrency loans is the use of a smart contract. A smart contract is an algorithm that connects borrowers with lenders across various platforms. All the lenders and borrowers must register their wallets in a single pool for the algorithm to function. Also, the borrowers and lenders usually set certain conditions that should be met before the code connects potential borrowers with lenders.
How Safe are Cryptocurrency Loans?
Conventional lending carries massive risks like borrowers failing to repay the loans. Banks try to minimize this risk by conducting creditworthiness checks on potential clients. Also, conventional banks may insure the loans that they give to their clients. So, when the client defaults, the banks may recover their money from the insurer.
Things are different in the world of cryptocurrency lending. Insurance companies do not cover crypto loans. Thus, you run the risk of losing money if the borrower fails to repay the lending platform. The lending platform will also lose money if a borrower fails to pay for the cryptocurrency loan.
Few lending platforms have tried to reduce the risks of defaulting by creating a special fund for their investors. Such platforms use the fund to repay lenders if a borrower defaults on their loans. Thus, if you deposit your money into the high-yielding accounts of such platforms, the risk of losing money if a borrower fails to pay up reduces.
Another significant risk of crypto loans relates to market volatility. The values of different coins fluctuate. For example, the ‘cryptocurrency winter led to the erosion of the value of coins. A sharp fall in prices led to a decline in the demand for coins.
Such volatility has a direct effect on your earnings as a cryptocurrency lender. When the value of the coin dips, your interest earnings as a lender follow suit.
Pros and Cons of Cryptocurrency Loans
If you would like to make money using crypto loans, it is important to understand the pros and cons of this approach. Here are the major pros of making money using cryptocurrency lending.
- Crypto loans are more convenient than other crypto-based ways of making money. For example, lending cryptocurrency is easier and more dependable than staking or holding the coins while waiting for their value to appreciate.
- Giving cryptocurrency loans is a way of making passive income. You do not have to be actively involved in the process. One lets the intermediary platform do the heavy work and only waits for the interest.
- Cryptocurrency loans are convenient even for borrowers. Borrowers are likely to repay crypto-backed loans on time. This is because the interest rates are lower than those of conventional loans from banks.
But crypto lending has its downsides, like any other product. Here is an important one.
- An elevated level of risk. Your chances of making money from cryptocurrency loans depend on the performance of the specific coins. If the value of the coin declines or there is defaulting, a lender ends up losing money.
Cryptocurrency lending is an effective way of making money if you hold the coins. A lender deposits money into a high-interest-yielding account with an intermediary. The intermediary platform then connects the lender with the borrowers of cryptocurrency. The borrowers then use the coins as collateral to get loans. But you should be aware of the risks involved in this form of decentralized financial services. The main risk relates to the volatility of the prices of cryptocurrency coins.