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Crypto lending is a unique way for traders to get a return on their digital assets. Crypto lending involves depositing your assets into a lending platform for interest purposes.
There are many perks for investors who become crypto lenders. As an example, a crypto interest account usually has higher interest rates. These rates are far higher than those in traditional savings accounts. But why is crypto lending such an attractive investment option? Let's find out.
Crypto Lending in a Nutshell
Do you know how crypto lending works? First, investors deposit their crypto assets into lending platforms. Next, lending platforms loan out deposited assets to borrowers.
Although some crypto lending platforms perform credit checks, DeFi lenders do not. Such platforms take huge risks. They do not carry out credit history checks for their borrowers.
Instead of credit checks, they rely on providing secured loans to borrowers. Under this system, the borrower deposits crypto collateral.
The value of the collateral deposited will determine the value of the loans they can get. This practice falls under the Loan Value Ratio (LTV).
Most crypto lending platforms have an LTV of 50%. In simpler terms, borrowers can only borrow crypto up to half the value of their collateral.
Lenders will ask the borrower for more collateral when the deposit value drops. Extra collateral will help to protect liquidation. When borrowers fail to deposit more collateral, lenders liquidate their deposits.
Increasing Your Yield With Crypto Lending
As a holder of digital assets, you want the value of your funds to increase. Investors must deposit money into a savings bank account to receive interest.
These institutions then provide loans to borrowers. Interest rates for bank loans are usually high. Thus, borrowers pay the bank a lot more in interest. Banks only pay out a small percentage of the accrued interest.
Depositing your assets into a crypto lending platform provides more interest-earning opportunities. As a rule, lending platforms split the interest they get from loans with their investors.
The interest rates for cryptocurrency accounts are higher than those of banks. Currently, there are various types of crypto loans. Thus, the crypto lending market provides an excellent opportunity to earn passive income.
A crypto holder can earn up to 20% APY interest by lending digital assets. These opportunities are available without any form of discrimination. Thus, lenders can interact with investors without knowing their identities.
Why Is It So Profitable to Lend Digital Assets?
Crypto lending has become profitable due to many factors. These factors each contribute to the need for crypto assets on the market. Among them are:
Demand
Recently, there has been a massive demand for crypto loans as more and more people realize how good they are. Usually, there are no credit checks. Also, there is a low bar for entry.
Both factors combine to make crypto loans an accessible financial instrument. Due to their availability, borrowers have begun to leverage these loans. Crypto loans serve individuals and companies that want to avoid traditional finance.
Supply
Crypto lending platforms aim to lend digital assets to borrowers who want them. Yet, there is a limited supply of lenders compared to borrowers. This factor helps to attract new deposits. Usually, new investments allow investors to earn higher interest.
Rate of Growth
While traditional institutions offer low-interest rates, crypto lenders offer higher alternatives. Crypto lending platforms also offer compound interest on their savings accounts.
The feature has helped increase the industry's growth rate over the years. Thus, funds grow more in these accounts than in standard savings accounts.
Early Adoption
Currently, only a few people know that these crypto interest accounts exist. With more investors' availability, the market's interest rates will drop. Thus, getting in early is crucial to earning the best interest rates. Early investors will access the highest interest rates before others show up.
Regulations Slowing Supply Mechanisms
Regulations from the SEC have hampered the growth of these crypto-lending platforms. Several investors are wary about depositing their funds into these accounts.
The lower supply means that interest rates will remain high for the time being. As long as these regulations continue, there will be doubts about crypto lending.
Increased Margin Trading
Margin trading allows speculators to borrow funds from lending platforms. Traders use the loans for crypto trading. Such speculators seek to make a profit from their trades.
The market's volatility makes it easy for intelligent investors to make a profit. So, many use margin trading to leverage much larger sums than they own.
This type of trading carries risks, but it also has the potential to pay off. Investors must spot the right opportunities to earn rewards. An increase in margin trading increases the demand for crypto loans. This factor also fuels lending profitability.
Other Factors
Many other factors impact the profitability of crypto lending. For example, some coins tend to have more demand than others. The utility of such crypto assets makes them suitable for margin trading. As a result, the demand for those assets is always high.
Lending Digital Assets to People Who Want Them
Where's the best place to get started with crypto lending? Several competitive crypto lending platforms offer competitive interest rates to crypto owners. If you lend crypto to them, you can earn quite a bit from their interest-bearing accounts.
Centralized and Decentralized Lending
Crypto lending can happen through centralized (CeFi) or decentralized (DeFi) processes. DeFi lending usually uses smart contracts to run its borrowing and lending processes.
In contrast, CeFi lending utilizes a central authority. Decentralized finance platforms don't have individuals at the center of their operations.
Lenders can lose their deposits if things go wrong because a smart contract is defective. Centralized finance platforms are better for lenders than these DeFi platforms.
Should You Lend Your Crypto?
The simple truth is that crypto lending has the potential for massive gains. However, you need to be aware of the risks associated with it. In 2022, we saw many centralized lending platforms go bankrupt. This was due to human error and greed. Many have argued since that decentralized lending, or staking, is in the future. We're of the belief that staking with decentralized protocols is the safest and most lucrative way to earn a yield on your crypto.
Disclosures
The content is only provided for informational purposes. It is not meant to be tax or financial advice, and it does not recommend any particular investment plan. Every investment has risk, including the possibility of a cash loss. Past performance does not guarantee future results.
Bitcompare does not guarantee good investment outcomes. The way a security or financial instrument did in the past does not show how it will do in the future. Before investing in options, clients should carefully assess their financial goals and risk tolerance. Due to how important tax issues are in all lending situations, a customer who is thinking about borrowing money should talk to a tax expert to find out how taxes affect the outcome of any lending strategy.
