Crypto-backed lending is gaining ground. But let’s not forget that the business model is not even three years old yet. A new tool means a confusing tool, also if useful.
Lending companies, including CoinLoan, urge users to “borrow against crypto instead of selling it,” whatever that means. Does this say anything to newcomers?
Why should one take a loan having already some coins? Why can’t one sell some crypto instead of using it as collateral? We often see a lack of understanding of CoinLoan services, as you can see from a piece from the conversation below.
CoinLoan doesn't ask users about their reasons for borrowing. Sometimes we are as wondered as Mr. T from the screenshot above when someone borrows BTC against BTC or makes another mindblowing move. For the team, it means that CoinLoan provides more use cases than we could ever imagine. We're learning together, all of us.
About a year ago, we collected three main arguments for using your crypto-asset as collateral. Maybe it's time to remind and broaden our understanding of crypto-backed loans. Moreover, we are preparing to introduce a new borrowing instrument on the platform that motivates us to write about five reasons in favor of borrowing.
1. Save Money
First, trading increases your tax liabilities. At least in the United States, Canada, countries of European Union, CIS and other jurisdictions that treat crypto as gain you owe taxes on profits not only selling crypto-assets back to fiat but on every single trade you make — even crypto to crypto. Second, you pay service fees to exchange or withdraw funds.
Borrowing on CoinLoan helps to avoid both tax implications and exchange fees that impact your overall cryptocurrency investment strategy. On the platform, you pay nothing for deposits and withdrawals in crypto; and for borrowing, you pay 1% only.
Given that you can choose your interest rate yourself, it is likely that related costs of borrowing will be lower than in other scenarios like selling or exchanging your funds. In CoinLoan’s calculator, you can evaluate the costs and benefits.
2. Keep Crypto
If you still believe in the asset, then you are supposed to be patient and hold steady, even if the price is dropping fast. Most of the crypto investors formulate a long term investment portfolio. But what if you think another asset is going to skyrocket and you need funds urgently to get in? What if you need money for a personal situation?
With a crypto loan, users meet their immediate cash needs without losing the ownership of the crypto asset. You can start small, with a deal of $100 and 7 days long. If the market value of cryptocurrency fluctuates, you can add collateral or vice versa, withdraw excessive collateral from an ongoing loan.
Nothing prevents you from repaying the loan ahead of schedule, there’s no commission for prepayment. As soon as the loan is repaid, you get your crypto-collateral back.
3. Earn While Holding
While you are waiting for passive income, it would be nice to make some money, isn't it? One of the more popular things we see CoinLoan users doing with their crypto loans is diversifying their investments and applying for various trading strategies.
Rebalancing and diversification are crucial to maintaining risk levels of investment over time. To build a diversified portfolio, investors look for assets that haven't historically moved in the same direction and to the same degree. Even if a part of the portfolio decreases, the other part is likely to increase. Or at least it wouldn’t fall as much.
4. Turn the Loan Upside Down
If the idea of making a profit intrigued you, here’s one more from CoinLoan. Don’t take a loan; use CoinLoan Interest Account to earn on your assets as you may earn on ordinary bank accounts.
This looks like a safe and less energy-intensive way to get a return on idle assets, as you get guaranteed fixed interest on your coins. Just recently, we added BTC and ETH to the Interest Account so you can make money for holding your crypto. As usual, interest is accrued daily and credited to your account on the first day of the month. More coins are coming soon!
5. Avoid Borrower’s Risk
Crypto-collateral ensures timely repayment, and reduces unnecessary delays, removes the need for credit checks and other paperwork. No need to prove solvency, the ability to meet long-term debts and other financial obligations.
With crypto-backed loans, borrowers don’t have to worry about the consequences if they fail to repay the loan on the scheduled date. Defaulting will not damage their credit score. Also, as banks have no role to play, they cannot close the user’s accounts or block a borrower from applying for a loan again.
When It Doesn’t Work
It seems fair to specify the situations when a CoinLoan crypto loan is not the one you want. We counted three of them:
- You have no crypto-assets to use as collateral and want to get an unsecured loan. Unfortunately, CoinLoan doesn't offer such a possibility.
- You feel it's the right moment to realize your crypto to make a maximal profit.
- You gave up on crypto-assets; you don't believe it's a good long term play for your portfolio.
On a Final Note
Cryptocurrencies made money digital and easy to use, secured at a low cost and cut the middleman out of the equation. Nevertheless, there are two missing ingredients that prevent crypto-users from “being their own banks”. When it comes to providing credit and paying interest, cryptocurrencies can’t cope on their own. CoinLoan is proud to be that missing ingredient that allows people to use the entire spectrum of their asset’s potential.
Disclaimer: The article is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
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