Can You Use Crypto to Access Liquidity Without Selling It?
Those who invest in crypto will always face a volatile market. Yet, there are moments when investors need to use their assets to fulfill short-term obligations. Investors would likely want to avoid selling their assets when the market isn’t providing suitable conditions. The good news is that there’s a way to access liquidity without selling the asset.
Crypto Borrowing
Crypto-backed loans are similar to traditional loans. It allows investors to use their crypto as collateral and receive a loan in return. Although there are similarities between conventional loans and crypto borrowing, they’re entirely different. When someone requests Bitcoin loans, they’ll receive funds based on the collateral’s value. While investors will receive liquidity, they’re not obliged to sell their assets. That way, they can still benefit from future potential value.
Decentralized finance (DeFi) spaces brought this solution forward. The method offers users control and flexibility over their financial decisions. While accessing liquidity, investors won’t lose their crypto.
Interest rates on crypto loans vary greatly depending on the platform and collateral type. As crypto loan terms are relatively flexible, borrowers can adjust the repayment terms based on their financial situation. Yet, one thing to note is that many platforms have over-collateralization. These platforms ask borrowers to put up more collateral than the loan they want.
Types of Crypto Loans
The market offers several types of crypto loans, each with strengths and weaknesses. Investors must first understand the kind of crypto loan they request to ensure it suits their needs.
The basic types of crypto loans are decentralized and centralized loans. Decentralized platforms are known for their cheaper fees and higher privacy. They allow borrowers to get a loan without a lengthy verification process, as they don’t ask for the borrower’s personal information.
On the other hand, centralized platforms are more user-friendly. Yet, they’ll require users to make an account and provide several documents for identity verification. Both types of platforms offer competitive interest rates, but decentralized platforms tend to offer variable rates following market demand. The repayment terms can be short or long. Some platforms may also provide stablecoin loans, which many prefer due to their stability.
LTV (Loan-to-Value)
Lenders providing crypto loans calculate the loan amount based on the LTV ratio. An LTV (Loan-to-Value) ratio indicates how much of the collateral’s value a borrower is allowed to take as a loan. For example, if the LTV ratio is 50%, and the borrower puts in $10,000 worth of Bitcoins as collateral, they can borrow $5,000 from the loan.
The LTV ratio follows the collateral token’s value and will change as its price rises and falls. If the borrower uses Bitcoin as collateral and the price decreases, the LTV increases. This can lead to additional collateral or liquidating the borrower’s collateral as repayment. Conversely, if the price rises, the LTV decreases. This can be advantageous to the borrower, as it gives higher flexibility.
The Advantages of Crypto Borrowing
Crypto borrowing allows investors to liquidate their crypto without selling it, but that’s not the only advantage.
Selling their tokens may feel counterproductive for long-time holders. Borrowing can be a smart alternative to selling. Investors can preserve upside potential while obtaining immediate liquidity.
Still, that doesn’t mean crypto borrowing is always better than selling. Investors should continually evaluate their options and see which best suits their needs. Selling tokens can lead to tax obligations on gains. Conversely, borrowing doesn’t have the same immediate tax implications. It also allows investors to preserve the token’s upside potential in long-term investment.
The Growth of DeFi And Crypto Lending
The launch of DeFi (decentralized finance) has changed how people can borrow funds. It provides a user-centric alternative that thrives on transparency and decentralization.
Centralized Finance (CeFi) relies on intermediaries. It requires users to transact with a third party for their financial needs, which can disadvantage some people. DeFi presents various advantages that make it an alternative to CeFi and enhance a few aspects of lending and borrowing.
DeFi utilizes smart contracts to automate processes. Alongside its blockchain technology, DeFi allows users to retain control over their assets through private keys and eliminate custodial risks.
Crypto lending has also improved, and crypto lending 2.0 has been introduced. It fixed several of its previous model’s flaws and boasts innovations that make lending and borrowing easier.
Crypto lending thrives on individualized collateral vaults. Thus, borrowers won’t face pooled collateral and retain asset title through SMA (Separately Managed Account) structures. It enhances user security by eliminating exposure.
With the implementation of smart contracts, crypto lending provides automation and better transparency. This includes enforcing agreements and loan terms. It gives borrowers real-time visibility into loan status and collateral. This system helps mitigate risks from centralized mismanagement.
Users’ control over their assets can be beneficial in its own way. It ensures their collateral remains safe from insolvency and platform failure.
Crypto lending also has a customizable LTV ratio, which users can adjust by withdrawing or adding collateral. This flexibility allows borrowers to respond to market changes.
Loans can stay active indefinitely. It’s an advantage for investors with confidence in the token’s long-term value. It allows borrowers to have the option to roll accrued interest into the principal. This adaptability makes crypto lending an effective solution for investors seeking liquidity while retaining control over their assets.