Crypto Loans Risks and The Downside of Crypto Loans

Your cryptocurrency can be used as collateral to secure crypto loans. These loans can be secured with a house or car and have very low-interest rates, same-day funding, and no credit checks. The downside?

Travis Gatzemeier is a certified financial planner who founded Kinetix Financial Planning in Dallas. “That’s going to be the biggest disadvantage of crypto.” It’s not a stable asset that you can borrow from.

Although risks are associated with cryptocurrency, borrowing against it, has become a popular topic on Reddit and YouTube. Is a crypto loan right to you?

What is Cryptocurrency?

With a white paper by an anonymous programmer on bitcoin’s concept, cryptocurrency was introduced to the financial dialogue in 2008. Bitcoin is a cryptocurrency or a digital version of money. Although it may seem complicated, it is essentially digital tokens and not physical money, depending on how you use the currency.

It can exchange bitcoin for goods or services on the blockchain. This is a digital ledger that tracks every bitcoin transaction. Ariel Zetlin Jones, an associate professor of economics at Carnegie Mellon University, Pittsburgh, says that the idea is meant to be simple.

We have always accepted physical tokens to exchange goods and services. We will be able to trade these tokens for money in the future. Zetlin Jones says that blockchain and bitcoin allow for the same type of transactions, but without the need to have physical tokens.

Also Read: These are the Top Crypto Exchanges in Britain in 2022

What is a Crypto Loan?

Crypto loans are a type of secured loan similar to a car loan in which you pledge an asset to secure financing. The cryptocurrency, in this instance, is the asset that a lender offers in exchange for cash. You’ll repay the loan in installments. The lender can liquidate the cryptocurrency or cash it out if you fail to repay the loan.

BlockFi, Celsius, and Unchained Capital are crypto lenders with low annual percentage rates, one-to three-year loan terms, and high minimum loan amounts. BlockFi offers crypto loans starting at 4.5% APR for one-year loans. The minimum loan amount is, however, $10,000.

Why Borrow Against Cryptocurrencies?

According to Gatzemeier, a crypto loan might be a good option if someone has a large amount of crypto and wants it to be liquidated without the need to sell it or pay taxes. These funds could be used to purchase or invest in a company, much like borrowing with a personal loan.

A crypto-secured loan could also offer lower interest rates for borrowers. There is no credit check, unlike other loans like emergency loans for bad credit.

Crypto Loans: The problem

Bitcoin’s prices fluctuated between $30,000 and $64,000 from April 2021 through October 2021.

A margin call is when the crypto’s unstable value means that the borrower has to put up more crypto to keep the original pledge in place.

If your pledged crypto drops below a threshold established by the lender, you will have a limited period to pledge more crypto.

LTV or loan-to-value in crypto-speak is the ratio between the amount of your loan and the collateral’s value. BlockFi, a crypto lender, has a maximum LTV of 70%. Borrowers have 72 hours to raise the crypto above that threshold.

Gatzemeier says that the federal government does not insure crypto loans because of their unstable pricing. Compensation is not guaranteed if your funds are lost due to a security breach.

Alternatives to Borrowing Against Crypto

You can borrow up to 85% of the value of your home if you have equity. You should be careful as your home could be taken away if you fail to repay.

You can get financing at no cost for up to 14-18 months with a 0% interest credit card. You could be charged a high-interest rate for unpaid balances after the initial period.

Credit union loans are available for those with bad credit. They typically offer flexible terms and rates. They may also take into account your history as a member. This means that they might have less stringent requirements.

You may also get a personal loan below $2,000 if you have a smaller loan need. Rates can be high depending on your credit score.