Discover some of the reasons why crypto-lending can be a profitable investment as well as some of the risks that are involved.
Is Crypto Lending Profitable: 5 Reasons Why It Is
(Photo by Alesia Kozik from Pexels)
Investment in cryptocurrencies has taken off in recent years. From around 50 cryptocurrencies in 2013, the number has exploded to over 20,000 cryptocurrencies in 2022 with over 10,000 of those being active. Either holding or trading cryptocurrencies has been the route that most investors take but there are a number of different ways to earn from cryptocurrency. Crypto lending has proven to be a profitable investment strategy that allows you to earn from your digital assets.
Investors wondering where to get a crypto loan or where to lend their cryptocurrency have two major types of platforms to choose from.
- Centralized Lending Platform: Investors deposit (lend) their cryptocurrency to the platform and receive interest on their deposit. Borrowers deposit their own cryptocurrency as collateral for loans. The lending platform manages all aspects of the transaction such as loan terms and interest rates. Centralized platforms require KYC checks and have access to the investor’s private keys. The majority of crypto-lending platforms are centralized.
- Decentralized Lending Platforms: Frequently referred to as Defi, decentralized lending platforms manage loans through the use of smart contracts. Users keep control of their private keys and lenders determine their own interest rates. Borrowers have the option to accept or decline. Decentralized platforms don’t require any KYC checks for borrowers or lenders.
Choosing a reputable lending platform is one of the key factors in minimizing risk when borrowing or lending cryptocurrency. Aside from reputation other factors to consider when selecting a crypto-lending platform include:
- Cryptocurrencies accepted by the platform
- Interest rates for borrowers and lenders
- Amount of collateral required to secure loans (Loan to Value ratio)
- Minimum and maximum deposit limits
- Fees charged
- Duration of loans
While crypto-lending can be very profitable it is not without its risks. The following are a few of the risks to consider when lending cryptocurrency.
- Market Volatility: Cryptocurrencies are notoriously volatile and often experience huge fluctuations in price over short periods. Even though a loan is paid back it is possible to suffer a lower value on return. If you loaned Ethereum when its price was $4000 and the loan isn't paid back until the price of ETH has dropped to $3000, the value of what you have loaned has dropped
- Lack of Regulation: Crypto-lending platforms aren’t regulated. This means that they don’t offer the same protections that banks do such as deposits being insured. Users risk the chance of losing funds should a lending platform encounter any solvency issues
- Vulnerability to Cyber Attacks: Crypto-lending platforms may be vulnerable to cyber-attacks, especially smart contracts
Profiting From Crypto-Lending
Both lenders and borrowers can take advantage of crypto-lending and use it to generate improved profits. The following are 5 reasons why crypto-lending is profitable.
1) Earn interest on your cryptocurrency: Investors can earn a passive income when lending their crypto assets. The interest that you are able to earn is typically much higher than what you would earn through traditional interest-bearing accounts at a bank. Interest rates can range from 5% APY to as high as 20%APY depending on the type of cryptocurrency you deposit to the platform
2) Loan is Secured: When you lend you cryptocurrency it is secured by the borrower’s collateral. The amount of collateral is determined by the LTV (Loan to Value) ratio. Typically, loans are over collateralized and if the LTV drops below a certain rate the borrower must increase the amount of collateral to ensure the security of the lender’s deposit
3) Hold on to your cryptocurrency: Many people invest in a particular cryptocurrency such as Bitcoin or Ethereum because they anticipate that it will increase in value. However, while waiting for the price of your particular cryptocurrency to go up, your digital assets are sitting idle. Both borrowers and lenders can put these assets to work and earn an income through crypto-lending without having to sell their cryptocurrency. If an opportunity for investment arises and you don’t want to sell your cryptocurrency to get the necessary capital, you can look to a crypto-lending platform to get the funds you need.
4) High demand: the demand for crypto-lending is on the rise. It is far easier to obtain a loan through a crypto-lending platform than through traditional lenders such as banks. Interest rates for borrowers are competitive and there are few or no credit checks. With the increasing demand for loans, the interest rates offered by platforms to depositors (lenders) are rising so that platforms can obtain the funds to meet borrower demands.
5) Grow your assets faster: As mentioned above, deposits to a crypto-lending platform typically earn a much higher interest rate than traditional methods. In addition, many platforms offer compound interest rates. If you aren’t withdrawing your interest, your deposit will grow at a much faster rate than that of a traditional savings account, providing much larger profits over the long term.
Crypto lending can be quite profitable if investors do their research and choose the right platform.