What are the Risks of Crypto-backed loans?

In our last posts, we spoke about How Crypto Backed loans are different from peer-to-peer loans, what are the different types of crypto loans, and advantages of crypto-backed loans. Continuing our discussion further on Everything you need to know about Crypto-backed loans, today we would be targeting the risks associated with crypto-backed loans or crypto lending.

No technology or concept is fool-proof, so while there are many advantages associated with crypto lending, there are some risks associated with it, that could be mitigated if you are an informed person. Here are some of the risks of crypto lending –

Platform Safety

There are two kinds of platforms that connect a borrower/lender in crypto lending. First being the firms offering their software solutions, connecting lenders/borrowers and charging a small fee for the platform. On such a platform, it is crucial to know about the security aspects followed by them. Has there been a past breach? If the data was hacked? Also, it would be good to know the kind of measures provided by the firm in case of hacking. Simply know all aspects of security measures and policies offered by the platform provider to safeguard your assets from being hacked.

The other entity is the online cryptocurrency community where borrowers/lenders interact directly with each other. In such cases, as it’s an independent contract executed by the borrower and lender, there are less/negligible chances of any assistance in case of disputes of defaults or in case of scams.

Default Rate

Blame it to regulation or difficulty is repaying the loan, but crypto-backed loans come with a possibility of higher defaulters when compared to peer to peer loans.

Volatility

Crypto market is up and running all throughout the day, so while arbitragers try to make a profit out of it. The lenders/borrowers might suffer a set back if the money repaid/borrowed has dipped throughout the day. In fact, many investors might see a possibility of seeing an assets’ value depreciated to a point where the debtor is better off defaulting than repaying the loan.

 

Refrences

finder, fastinvest.