Cryptocurrency acceptability widely increased due to the COVID-19 pandemic, with several opportunities to grow wealth. The cryptocurrency industry is still innovating, providing more opportunities for investors. One of them is crypto lending that has become one of the trending topics in the crypto industry. Crypto lending allows investors to earn an immediate return without requiring them to sell their cryptos.
Let’s learn how you can invest in crypto lending and make a profit out of it.
What is crypto lending?
Ahead of investing in crypto lending platforms, you must know what is crypto lending, how does crypto lending work, how you can earn income without selling your assets, and what kind of benefits will give you the investment in crypto lending platforms. Crypto lending is a new yet flourishing sector. It enables investors to earn by utilizing their crypto holdings without selling their assets. Investors lend their cryptos through a lending platform, and they get interest payments called crypto dividends in return.
How does crypto lending work?
The lenders and borrowers are connected through a lending platform. The following is the step-by-step process of crypto lending.
- A borrower visits a crypto lending platform to request a crypto loan.
- The borrower will stake some cryptos as collateral once the platform accepts his loan request. He cannot use these staked cryptos until he pays back the entire loan amount to the lending platform.
- Investors fund the loan to the borrower through the lending platform, but he remains unaware of the process happening at the back end.
- Borrowers pay interest to the platforms, and investors receive their share of interest from the platform.
- Once the borrower has paid back the loan amount and interest, he can take back the collateral.
How can you invest in crypto lending?
Once you have decided to invest in crypto lending, the first step is to find the right platform to start investing in crypto lending. Mainly there are two types of crypto lending platforms out there.
Centralized lending platform: It involves a third party that manages the transfer of loan amounts.
Decentralized lending platform: It does not depend on the third party; instead, smart contracts handle the entire process.
The next step is to choose between a manual and an automated lending platform. Automated is always a better option as it operates everything automatically, and everything is simplified. While for the manual, you must have a good understanding and experience.
Always make sure you choose a legit platform. You will be completely dependent on the platform; therefore, you surely do not want to regret choosing a platform with a horrible history.
Once you have selected the platform, the next step is to check all parameters carefully. Find out what is the interest rate your chosen platform is paying. What strategy that platform applies to help investor recover funds if a borrower fails to pay back the loan amount. How much tax you will have to pay on the interest or other fees.
If all is done, go to your selected platform and deposit your cryptos in an investment account to offer them for lending purposes. When the platform approves a borrower’s loan request, you will have to release funds, and that’s it. After this, you will be receiving interest through the platform on each interval as decided.
After the fixed loan duration, the borrower will pay back the loan amount, and you will receive your cryptos back, making a profit on your assets while retaining your ownership.
Profit on crypto lending
Profit on crypto lending depends on how much interest you are earning. Many crypto lending platforms are offering different interest rates on crypto lending. Compare the returns on a different platform for a specific coin to choose a platform. The following table shows the interest rate on various cryptos on different lending platforms.
Table: The interest rate on different cryptocurrencies on crypto lending platforms
Why should you choose crypto lending?
Crypto loans provide an easy alternative to lengthy process of lending process. You can get a loan without requiring checking your credit score or income slip. However, the amount of loan you can get depends upon the value of the collateral you deposit.
Crypto loan applies loan-to-value (LTV), the ratio between the approved loan amount and the collateral value. You will receive a loan amount less than the value of collateral, depending upon the ratio of LTV. For example, if the LTV ratio is 60%, you will receive a loan of $3,000 after depositing collateral worth $5,000.
Crypto lending offers opportunities to make profits. There are many risks associated with it as well, where you need to be careful. Over-collateralization is often considered an obstacle, and to overcome this, some platforms offer zero-collateralized or semi-collateralized crypto loans. Therefore, promoting increasingly crypto loans adoption globally.