Crypto and Bitcoin Loan Sites

What is Bitcoin and Crypto Lending?

Bitcoin and crypto lending refers to the process of lending and borrowing digital assets, primarily Bitcoin and other cryptocurrencies. It involves using cryptocurrency as collateral to secure a loan, which is funded by a lender on a lending platform.

For borrowers, Bitcoin and crypto lending provides an alternative to traditional banking and financial institutions, enabling them to access capital without the need for credit checks, collateral, or other formalities. Instead, borrowers can use their cryptocurrency holdings as collateral to secure a loan, with the amount typically determined by the value of the collateral.

For lenders, Bitcoin and crypto lending offer an opportunity to earn interest on their cryptocurrency holdings by lending them out on a lending platform. This can be more profitable than traditional savings accounts or other investment opportunities due to the high demand for borrowing digital assets.

Bitcoin and crypto lending platforms offer various loan types, such as fixed-term loans, lines of credit, and collateralized loans. They also offer competitive interest rates and flexible repayment terms, making it easier for borrowers to access capital and for lenders to earn returns on their investments.

However, it’s important to note that Bitcoin and crypto lending platforms involve some degree of risk, as the value of digital assets can be volatile and the lending platforms themselves may face operational or regulatory issues. Therefore, it’s important to do proper research and due diligence before using these platforms.

Lending Bitcoin for Interest

Lending Bitcoin for interest is a popular way to earn a return on Bitcoin holdings. It involves lending out Bitcoin to borrowers through a lending platform in exchange for interest payments.

There are several Bitcoin lending platforms available, including Nexo, Celsius, BlockFi, and YouHodler, among others. These platforms offer different loan types, such as fixed-term loans, lines of credit, and collateralized loans. Lenders can choose the loan that best fits their needs and investment goals.

To lend Bitcoin on these platforms, lenders deposit their Bitcoin into an account on the platform and then select a loan to fund. The borrower then receives the loan and pays interest on the loan until it is repaid. The interest rates offered on these platforms can be competitive, often exceeding the rates offered by traditional savings accounts or other investments.

However, it’s important to note that lending Bitcoin for interest carries some risks. The value of Bitcoin can be volatile, which means that the value of the loan collateral may fluctuate. Additionally, the lending platform itself may face operational or regulatory issues, which could impact the lender’s ability to withdraw their funds.

Therefore, it’s important to do proper research and due diligence before lending Bitcoin for interest. It’s also recommended to only invest funds that you can afford to lose and to diversify your investments across multiple platforms to minimize risk.

Calculating a Bitcoin backed loan

When you take out a crypto backed loan, you’re placing your cryptocurrency as collateral. Since cryptocurrencies tend to be extremely volatile, the loaning company needs to make sure your collateral value can always cover the loan, in case you can’t repay it back in fiat.

One of the ways a company can make sure your collateral will be able to cover the loan is through calculating the LTV ratio of the loan.

LTV Ratio

A loan’s LTV (loan-to-value) ratio determines the amount of crypto collateral you need to post in order to take out or maintain a loan. It is calculated by dividing the amount loaned with the amount put as collateral.

For example, a $10,000 loan with a collateral of 2 BTC each worth $10,000 has an LTV of 10,000/2*10,000 = 0.5 or 50%.

Here’s another example – A $10,000 loan with a collateral of 5 BTC each worth $10,000 will have an LTV of 10,000/5*10,000 = 0.2 or 20%.

Keep in mind that when cryptocurrencies fluctuate in price the LTV changes as well. For example, if Bitcoin suddenly drops to $5,000, the LTV of our latter example would be 10,000/5*5000 = 0.4 or 40%.

A lower LTV means that your collateral can easily cover the loan if needed, while a high LTV puts the lending company at risk that you may not be able to repay your loan.

LTV Percentage Range

The different Collateral Health thresholds are as follows:

Margin Calls

If your LTV becomes too high, a margin call may occur by the lending company. A margin call means that you, the borrower, would need to take steps to lower back your LTV. This can be done by either depositing more cryptocurrencies as collateral, or by paying back some of the loan in fiat.

In case you can’t do either of the above, the lending company may sell some of your collateral in order to lower the LTV into the safe zone.

Origination Fee

Many companies take an origination fee for setting up the loan. For example, a company that charges a 2% origination fee for a $10,000 loan will take $200 as payment for the service.

Loan APR

APR stands for annual percentage rate. The APR is the overall annual interest you would require to pay for your loan, all fees included (interest + origination fee). The APR is calculated by dividing how much you pay at the end of 12 months with the original loan amount.

For example, if you took a loan for $10,000 with an origination fee of 1% and an interest rate of 5%, the APR would be 6% (5+1) and at the end of 12 months, you’ll need to pay $10,600.

Important:

Some companies calculate interest rate on a compounding basis , making the APR a bit harder to calculate.

Most companies will supply you with a loan calculator or some kind of estimate of your APR. Before taking out a loan, make sure you understand exactly how much you’ll need to repay.