Crypto Loans or Blockchain-backed loans is the trending concept these days that assist crypto enthusiast in earning profits. While lenders enjoy the benefit of earning interest on their digital currency, borrowers use the funds to short sell or shorting. The interest rate earned by lenders vary from 5 – 50% each year.
As per a study by the Unchained Capital, the potential lending market for crypto assets is estimated at around $20-30 billion. Even though cryptocurrencies are highly volatile, they also offer high liquidity. Bearing in mind the possible risks of volatility, liquidity similar to fiat money makes cryptocurrency an ideal asset for loans in fiat.
But how could they be used to reduce credit risk? Let’s explore –
Crypto loans reducing Credit Risks?
Crypto-backed loans offer a unique opportunity to the borrowers to receive funds for any investment they want. Unlike traditional banking where interest rate varies with home loans, car loan or personal loan, crypto loans work with a simple equation of obtaining a loan in fiat of up to 50% of the market value of its crypto asset. Since the deposit is always more prominent than the loan amount, the creditor never can face the defaulter’s risk.
However, in cases when volatility has exceeded the threshold, the lender has the right to make a margin call, i.e., to sell off the crypto asset at market price to pay off the loan amount.
However, if the deposit amount has been affected due to a drop in cryptocurrency the borrower is sent a warning message narrating the deposit amount to be insufficient. In such cases, the crypto exchanges or crypto lending platform ask borrowers to deposit sufficient funds, pay off a part of debt [partially or fully] or sell part of the crypto asset to repay the remaining debt.
Crypto Loans reducing Margin Call Risks
The borrower can also reduce the risks of a margin call by smartly choosing the ratio of deposit and loan size. With a smaller loan amount value, less impact to the price fluctuations with lower interest rates and longer loan terms as it reduces loan risks to the lender, thereby saving borrower from the margin call risk.
While for banks defaulters risk is huge, in the crypto world it could be controlled and managed effectively. Crypto loans also offer the advantage of lower processing fees and fast processing. For more details on Advantages of crypto loans, check our post – Advantages of crypto-backed loans.
Crypto lending is one of the easier ways of earning a passive income if chosen wisely. It is also considered a common alternative to investors who are inclined towards crypto trading but could not find enough time to practice it daily.
Nuo is a decentralised and transparent crypto banking platform. It acts as a blockchain powered financial control centre to store, spend, borrow and grow your crypto-currencies. Install the android app or try out our crypto backed loans platform.
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