I'll quickly explain what crypto loans are, how they work, and why you'd want to use them. However, I would like to state that the articles on Travisten are not financial advice and are solely for educational purposes. Loans against cryptocurrency are risky, and you could lose it all. So keep that in mind. So, let's get started.
So a crypto loan is when you use your cryptocurrency as collateral in exchange for something. Most of the time, it will be for cash or coins. In some ways, it's similar to a home equity line of credit, or HELOC, but on steroids because you're using a highly volatile asset as collateral. The reason for using this method is that the person does not want to sell his or her coins for cash. For whatever reason, the person may believe that the value of the coins will rise and that it is better to keep them rather than sell them.
Perhaps the individual does not want to create a taxable event by selling the coins. As an example, suppose Bob incurs a $1,000 unexpected expense. But he doesn't have the money right now because his money is all locked up in different places. He could sell his cryptocurrency and use the proceeds, but he doesn't want to do so when the market is down, and he also doesn't want to incur a taxable event. Instead, he decides to get the $1,000 by borrowing against his cryptocurrency.
He discovers a platform that will give him $1,000 in exchange for $5,000 in coins to be used as collateral, and they will charge him 5% interest on the loan. They also state that if the value of Bob's coins falls below $500, they will notify him to either deposit more coins as collateral or repay some of the loan, or a combination of the two. If they do not do so, they will be forced to sell Bob's coins on his behalf in order to protect their losses. They will then return any remaining funds to Bob.
Now that we've established what crypto loans are and why people might want to use them, I'd like to discuss two major risks associated with using your coins as collateral. The first is the possibility that the platform will shut down, engage in exit scams, or place a hold on withdrawals. It's entirely possible that the platform will go out of business alongside it. Your deposited funds as a result of funds mismanagement.
Nowadays, three AC or three arrows capital, celsius, and BlockFi are used. In the previous example, if the platform went bankrupt, Joe would be out $4,000, which is the $5,000 in coins he put in minus the $1,000 in cash he received. The second risk is that the value of the collateralized coins drops significantly, resulting in a margin call or liquidation. Many lending platforms will have a margin requirement in many cases.
This means you'll have to give a lot more money in terms of coin value than you're getting. In the previous example, Bob gave five times the amount borrowed. He gave $5,000 in coins and received only $1,000 in cash in return. The risk is that cryptocurrency prices are volatile, especially when prices drop. Using the previous example, suppose the $5,000 in coins has now been reduced to one $500.
Remember, the platform stated that if Bob does not increase his collateral or decrease his loan amount by $500, they will sell his coins on his behalf. Bob may have extra money to pay back to reduce his borrowed amount, or he may have more coins to use as collateral to reduce his margin call figure, indicating that everything is fine. If he does not comply with the platform's request, they will automatically sell off his collateralized coins and return to Bob the money owed to him, which is $500 (the one $500 of coins minus his $1,000 debt). We're going to keep things simple and not include any additional fees.
Bob not only lost his coins, but he also experienced a taxable event as a result of their sale. One thing to keep in mind is that during turbulent times, many crypto networks become congested as people send coins from wallet to wallet, making it both difficult and expensive to send coins. So that's basically how crypto loans work. It is up to the individual whether the risk is worthwhile.
More Articles Below
Bitcoin and Crypto Taxes: Tax.Crypto.com
4 Reasons Why Cryptocurrency Regulation Is a Good Thing
8 Places to Spend Bitcoin in Canada
%20BBB.png)
