What is a Bitcoin Loan and How Does it Work?

A cryptocurrency-backed loan uses digital currency as collateral similar to security-based loan & allows users borrow & lend cryptocurrency for fee/interest.

What is a Bitcoin Loan and How Does it Work?

A cryptocurrency-backed loan uses digital currency as collateral, similar to a security-based loan. The basic principle works like a mortgage loan or a car loan: you commit your crypto assets to get the loan and repay it over time. A crypto loan is a type of secured loan, similar to a car loan, in which an asset is committed to secure financing.

Crypto lending

refers to a type of decentralized funding that allows investors to lend their cryptocurrencies to different borrowers.

In this way, they will receive interest payments in exchange, also called “crypto dividends”. Many platforms that specialize in lending cryptocurrencies also accept stablecoins, in addition to cryptos. In principle, bitcoin loans work just like any other loan. A lender lends his bitcoin to a borrower.

The borrower then reimburses the loan with interest. Bitcoin loans can be processed as private loans directly between two parties who hold bitcoin wallets. However, it can be difficult for people to connect with others they can trust and who are willing to lend or borrow them in bitcoins. This has led to the emergence of a number of online bitcoin lending platforms that have emerged as loan intermediaries between lenders and borrowers, making it easy to lend or borrow bitcoin and earn interest.

Crypto loans allow users to borrow and lend cryptocurrency for a fee or interest. You can get a loan instantly and start investing just by providing a guarantee. This could be through a DeFi lending DApp or a cryptocurrency exchange. When your collateral falls below a certain value, you will have to recharge it to the level required to avoid liquidation.

When you return your loan plus a commission, your capital is unlocked. Borrowers use digital assets as collateral for loans, similar to how you use a house or car as collateral for a home or car loan. You may not intend to use or trade your cryptocurrency for the foreseeable future, so this allows you to get money for the expenses you need to cover now without needing to make a transaction with your digital assets. Like a security-based loan, a cryptocurrency-backed loan guarantees digital currency.

Basically, it looks like a mortgage loan. You hold your crypto assets to get the loan and return it within a predetermined time. These types of loans can be obtained through a cryptocurrency lending platform or a cryptocurrency exchange. Although you still retain ownership of the cryptocurrency with collateral, you give up the right to transact with digital currencies.

Asking for cash using Bitcoin as collateral. Reputable bitcoin lending platforms usually partner with debt collection agencies to collect. Regardless of how the value of bitcoin changes relative to fiat currencies, you probably won't realize it as long as you borrow, spend, earn and return bitcoins. Bitcoin loans provide a way to put your satoshis to work without having to leave your investment position by selling your bitcoins.

If you are one of the few people who actually earn bitcoins and make relevant purchases or investments with bitcoin, then the volatility of bitcoin probably doesn't matter much to you. As a borrower, the biggest benefit of bitcoin loans is that they allow you to get your hands on cryptocurrencies, which you can invest directly in services that require payment in bitcoins (shares of bitcoin mining centers or purchases of tokens during ICOs, for example). However, bitcoin loans do not offer added value compared to standard peer-to-peer loans when used in this way. In all cases, obtaining bitcoins that must then be sold to obtain fiat currency and buying bitcoins to repay loans involves additional costs (including the spread or commission charged by bitcoin markets).

Unless you expect bitcoin's value to fall and want to go short on a bitcoin investment, you should consider investing only in bitcoin-denominated loans. A big part of the value of Bitcoin loans is that they can be processed between lenders and borrowers in many different countries without paying high transfer and currency exchange fees. Borrowers can usually choose between loans denominated in bitcoins and loans denominated in a main currency (euros or U. S dollars).

However, the value of the collateral may not guarantee the loan consistently if the price of bitcoin increases over the term of the loan. For example, if the value of the dollars in bitcoins and the value of the bitcoin borrowed by the lender doubles over the term of the loan, the borrower would only repay $1000 in bitcoins, and the lender would lose half of its investment. For example, if you borrow 1 bitcoin for 2 years with an interest of 8% per annum, then you must return 1 bitcoin plus 0.16 bitcoin as interest over the term of the loan. British bitcoin lending platform Nebeus, for example, charges a brokerage fee equivalent to 3.9% of each transaction to buy bitcoin on your behalf, but doesn't charge a fee for selling bitcoins.

As a borrower, bitcoin loans help you get an asset that is currently highly liquid and can be easily converted into cash.