All You Need to Know About Crypto Collaterals

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Just like your property or stock shares, cryptocurrencies can also be collaterals for your loan. Investors looking for an alternative option to mortgaging their physical assets have been seen to shift to the crypto market.

Crypto loans work in a similar way as traditional loans, with the only difference in the nature of your collateral. In such loans, the borrower uses his cryptocurrencies as collateral to the lender throughout the loan repayment period. The loan amount depends on the loan-to-value ratio and the type of cryptocurrency you mortgage.

Needless to say, Bitcoin and Ethereum are the two most popular cryptos, which are widely accepted as collaterals. However, there are several options, and the kind of cryptocurrency accepted by the lender is the latter’s discretion.

Wondering what you could use crypto loans for? Though that, too, depends on the lender, you could mostly use them as personal loans. However, is mortgaging your crypto a wise decision? There are several factors to consider.

Types of crypto loans

Crypto loans can be of two types:

Centralized finance (CeFi): As the name suggests, the lender has complete control over your crypto assets during the loan’s tenure, and this is the most popular form of a crypto loan.

Decentralized finance (DeFi): DeFis are operationalized through smart contracts where you still have control over your crypto assets. However, the lender can conduct automated operations on your crypto holdings in case you fail to pay your instalments or the value of your crypto holdings fluctuate.

Top Firms Offering Crypto Loans

If you are wondering where to start with mortgaging your crypto assets, here are some of the top financial institutions to consider for the best deals.

 

Aave

Aave offers a range of loan benefits and supports seven different cryptocurrencies like Ethereum, Arbitrum, Avalanche, Bitcoin, etc. The platform also offers flash loans to borrowers that help them repay loans in single transactions.

Alchemix

Known for its hassle-free loan transactions, Alchemix offers automated transactions. Thus, the borrowers do not have to worry about manual payments and can automate the procedure using smart contracts. What’s more? The platform offers a 50% loan-to-value ratio on your crypto assets.

CoinRabbit

CoinRabbit is known for its wide range of collaterals. The platform supports 170 kinds of cryptocurrencies, which indicates most crypto investors can use their crypto holdings for personal loans. The platform also offers quick loans without conducting credit checks.

Are Crypto Loans Risky?

Though keeping your crypto as collateral can offer several loan benefits, users are yet contemplating such mortgage options owing to the volatile nature of the crypto market.

Thus, crypto loans are subject to frequent margin calls whereby the borrower is required to increase their mortgage amount owing to the reduced prices of their crypto holdings.

Moreover, since most of the crypto loans are CeFis, the borrowers lose authority over their crypto holdings.

However, that doesn’t indicate a bleak future for crypto loans. With an exponential rise in crypto investments and increased awareness about the market, cryptos are expected to emerge as popular collaterals, considering their bullish trends in 2023.

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