What Is Crypto Lending?
Come check out our article to learn more about what crypto lending is and how it works, so you can decide whether this new trend in finance and blockchain is right for you.
What is the interest rate you get at your bank? 0.5%, perhaps 0.8%? Probably not much more. But have you ever heard of crypto lending? With a cryptocurrency loan, you can earn up to 10% a year just by depositing your crypto assets!
Hold on before you run away. You are probably suspecting a scam. How is it possible to earn these rates? It smells fishy.
But hear me out first.
Securities Lending Is a Common Practice
Crypto lending is basically the same as traditional securities lending, just with cryptocurrencies. When you buy stocks through your broker, fees are usually quite low; some brokers even offer zero-fee trades. This is possible only because they generate income by lending out your stocks to third parties.
Securities lending is a common practice in the financial industry. Most exchange traded funds (ETFs) also lend out securities. There is typically no counterparty risk because the lending party asks the borrower for collateral, usually in the form of highly-rated treasury bills.
Crypto Lending Generates Interest Yield
Crypto lending works similarly: You deposit your cryptocurrencies with a lending platform, and they then pay you interest. They will lend your assets to third-party borrowers, who in return have to pledge collateral in the form of other crypto assets.
These loans are overcollateralized by the platforms, meaning there should always be more collateral on the balance sheet than loans, which results in no credit risk for the depositors.
There Is No Free Lunch
However, the problem is that you don't know whether the platform providers truly overcollateralized all of their loans. What if they didn't? If a borrower defaults, you are at risk of losing your deposit if the platform goes bankrupt. Additionally, there are other risks associated with the crypto industry, such as regulatory uncertainty, fraud risks, and technical risks.
The bottom line here is that crypto lending and double-digit interest returns are real. However, there is no such thing as a free lunch, meaning these returns come at a risk. Crypto lending is not for those looking for absolute safety. Those that are willing to accept a bigger risk in exchange for a higher return, on the other hand, might want to take a look.
Work with Export Portal
At Export Portal, we understand how difficult penetrating new markets can be. That’s why we have collaborated with different experts to keep you informed and updated. Check out our site today and learn more about how we can help you expand your business.
Comments 2