One of the primary issues of the 2018 bear market for crypto investors is the dichotomy of, “I need some liquid capital, but no way do I want to touch my crypto”.
So, thankfully, the financial engineering of the crypto industry can help with that.
Crypto-backed loans are becoming more and more popular and represent a solution to freeing up capital by collateralizing your crypto. What’s more, they’re a great alternative to traditional loans and traditional banks.
Because blockchain tech is used to secure and transmit the loans, there’s also transparency and trust that the loan is serviceable.
So, crypto-backed loans are exactly what they sound like. You put up your cryptocurrency as collateral and get fiat in return. What’s more, you skip the need to do credit checks, verification, and fill out extensive documentation.
The loans are provided by decentralized blockchain platforms, and the loans themselves are really just a smart contract that both parties agree to.
The terms are simple, there’s no nonsense like hidden fees that you might deal with at a bank, and once you repay the loan, you receive your crypto back.
However, one potential hangup is the volatile nature of crypto assets. Should there be drastic fluctuations, a borrower may be required to increase their collateral as lenders are protected by margin calls.
What’s more, the crypto lending industry is still quite small
However, this is simply a side-effect of its nascent nature. When it comes down to it, there is a lot to like about crypto loans over traditional ones, and in time more people will come to realize that.
For one, the collateralized assets are kept in cold storage, so there’s often little chance the assets are stolen.
But what really interests me (pun intended) is that because the interest rates are so low, and because you don’t need to sell your crypto assets, you could find yourself paying back the loan only to have made a massive profit should the underlying crypto have gone up.
So, in a sense, not only are you exempt from income taxes (I am not a CPA so don’t take that as 100% true), but you are potentially paid to take out a loan of which you’re the borrower.
In a sense, having your cake and then getting three more cakes.
Where I could really see this be popular (if it’s not already) is in the purchase of a home, in paying off high interest debt like credit cards or student loans, funding your startup or someone else’s business venture, or just paying off miscellaneous debt that always seems to haunt us.
So, while there are risks, I do think that there’s a huge amount of potential here to see the face of lending change for the better.
Right now there’s some serious contenders in projects like Nexo and SALT (which recently got in trouble with the SEC for its ICO).
I also see projects like Celsius trying to add more functionality to the model, allowing you to earn interest on your investments or even use your crypto as margin to short the market.
Nonetheless, the advantage (and risk) goes to the early adopters.
Be careful out there and please do not take out loans unless they make sense for you. Please weigh the decision with your certified financial advisor.