Have you ever looked at your crypto holdings and thought, "There has to be a way to make this work for me?" Crypto loans offer a revolutionary way to unlock the value of your crypto without selling it.
Like many crypto holders, I have a portion of my assets invested in tokens. In the traditional financial system, loans are readily available through banks, who accept various assets as collateral – things like stocks, bonds, real estate, or even projected future income.
Examples of traditional loans include:
- personal loans: your bank offers you a loan of $25k to be repaid over 5 years with an APY of 15%, rate usually varying based on multiple factors, including your history with the bank
- credit loans: your bank lends you money for purchases, but until you repay in full, you accrue interest usually at a pretty high rate (say 24% APR)
- margin loans: your brokerage firm lends you cash, up to a fraction of the value of your portfolio, in exchange for interest (APR is usually current fed interest rate + a few percentages on top, depending on the size of your portfolio), as long as your loan to value (LTV) doesn't go below a threshold (in which case you would receive the dreaded margin call 😱)
- HELOC loans: you use your net equity in your real estate property to borrow money within an agreed period at a specified interest rate (usually mortgage rate + some cherry on top)
- peer-to-peer loans: you borrow directly from your friend or use a matching platform, agreeing for duration and interest rate
What's common with all those methods?
You receive (directly or indirectly) cash (i.e. a single asset). Some of them are secured (margin, HELOC, p2p), i.e. collateralized by your assets, while others aren't (personal, credit).
In this post, we only cover over-collateralized loans (i.e. you can only borrow up to a percentage of the value of your supplied assets) that you can do in decentralized platforms like BenQi or Aave.
🔗 How does it work with crypto? - You supply some assets (e.g. AVAX, BTC.b, ETH.e, USDC, USDT, DAI.e) ⏩ this makes them available for other users to borrow from you (and you get some interest from that!)
- You set them as collateral (which unlocks borrowing for you): each token may have different collateral factor (i.e. percentage of your asset value that can be borrowed)
- You can now borrow (whitelisted) assets, and use that purchase power without selling your tokens!
- ⚠️: remember that you can be liquidated if your borrow limit goes below zero!
- It's a bit of a mix of margin loan (for borrow capacity purposes) and peer-to-peer loan (for interest rate dynamics), but powered by the blockchain and smart contracts.
🆕 What are some of the novel aspects? - You can not only borrow fiat currency-pegged assets (USDC, USDT, etc.), but also other tokens (e.g. AVAX, BTC, ETH, etc.), which means that you have way more opportunities to hedge
- The interest rates are dynamic and depend on supply vs borrow utilization rates (which can be good or bad)
- [my favorite one 💟]You can borrow different versions of USD (USDC, USDT, DAI, etc), which means that you can strategize on your pick(s) based on interest rates, risks of the token depegging (remember March 2023, SVB and USDC flash crash?), etc.
- You may get rewards from borrowing an asset (yes, you can get paid for borrow! It's usually some native tokens + platform tokens)
Thoughts? 🤔
With four years of experience in crypto loans, I have developed a deep understanding of their mechanisms and potential benefits. For users to effectively utilize crypto loans, a thorough knowledge of the crypto market is essential to mitigate risks. I have successfully leveraged these loans to finance my endeavors with effectively "free" money.
However, it's important to note that crypto loans are most effective during a bull market. Catching the beginning of a bull market and understanding the fiat valuation of your funds is crucial. A comprehensive grasp of the crypto market is vital to manage the liquidation point, as a lack of understanding can lead to liquidation.
For example, in August 2020, I deposited 0.5 BTC and 2 ETH into a loan account, with a loan-to-value (LTV) ratio of 50%. This means I received 50% of the value of my collateral in the form of a loan. As the market price increased, I gradually repaid portions of the loan. By January 2021, 0.25 BTC had more than doubled in fiat value, allowing me to repay the loan using the profits from the bull market.
During bear markets, I utilized USDC, which has a higher LTV ratio of 90%, and whose value does not fluctuate. This strategy enabled me to finance my needs and eventually withdraw an equivalent amount of fiat to what I initially invested. In crypto terms, this results in a loss of coins, but the strategic use of market conditions allowed me to maximize my financial gains.
Maybe things changed in terms of crypto loan offerings, I need to revisit and test if crypto loans evolved or not.
That's gold! Thanks for sharing! 🙏
I tend to do it the "opposite" way:
- when bull, borrow in (the most volatile) crypto, directly convert into fiat asset (and use that money for your projects);
- when bear, your borrowed crypto would have a lower fiat value -> borrow that value back in fiat and repay crypto loan.
I call that strategy inflating your debt down to zero (might write a longer post about it).
(⚠️: Of course, it's risky as it's basically shorting the crypto asset, but as you said, knowledge of the crypto market risks is paramount!)
TLDR 🫰
Tired of watching your crypto sit idle? Crypto loans offer a revolutionary way to turn your tokens into cash without ever having to sell them.
Imagine buying that dream gadget or covering unexpected expenses – all with the power of your crypto holdings!
- Break free from the bank: Unlike traditional loans, crypto loans don't require a credit check or mountains of paperwork. Just deposit your crypto (like AVAX, BTC, ETH, or stable coins) and unlock its hidden potential.
- Borrow smart, not hard: Crypto loans allow you to borrow a portion of your crypto's value as cash (USD, EUR, etc.) or even other cryptocurrencies. It's like a margin loan on steroids, but powered by the security and transparency of blockchain technology.
- More than just cash: Forget boring old loans! Crypto loans offer dynamic interest rates that can work in your favor. Plus, some platforms even reward you for borrowing! (think free tokens!)
- Hedge your bets: Borrowing different versions of USD (like USDC, USDT, DAI) allows you to strategize based on interest rates and minimize risks. Remember the USDC flash crash? Crypto loans give you more control.
