You see, almost everybody in the crypto space agrees that DeFi (decentralized finance) will be a big thing once it really takes off. DeFi is considered revolutionary because it will eliminate unnecessary fees, middlemen, and manual processing, in a lot of different financial aspects. More importantly, it can eliminate the need for trust at a certain level.
Among all of these DeFi applications, there’s one important category that might be adopted much faster before all the others. That category is “lending and borrowing.” Yes, crypto loans have huge potential to be adopted even by the non-crypto community. This article explains why.
How Crypto Loans Work
Crypto loans “mimic” the concept of standard financial loans, but everything can be finalized and transacted directly on the digital world. At the time this post was written, one of the biggest companies that specialize in crypto loans is Nexo. With Nexo, a credit line can be instantly available, as long as you have crypto assets to be used as collaterals.
Let’s take a look at how the process actually works. First of all, you need to create an account. After that, you can deposit your crypto assets like BTC to your Nexo account. Your collaterals will be secured and maintained by the renowned custodian, BitGo (they are regulated and fully-insured in case your cryptocurrencies get stolen).
After you do this, the credit line will become available instantly. You can then withdraw the loan to your bank account or spend it instantly with your card. The interest of the loan will be debited from your available limit. There’s no hidden fee here.
As for the lenders, they can choose whether to give the loans in the form of fiat (USD, EUR, GBP) or stablecoins (USD, TUSD, USDC, PAX, and SAI). The promise is that each lender can earn up to 8% interest annually.
Why Do People Take Crypto Loans, Anyway?
Now, here’s the important question. Why do people take crypto loans when they realize it’s already very risky to invest in cryptocurrencies. Well, there are several different reasons as to why people might be interested in taking crypto loans.
One of the main reasons is because someone might need cash, but he doesn’t want to miss out on crypto gains. For example, in 2020 (so far), the Bitcoin price has been going up. Someone might think it can continue to go up, but he needs some liquid cash to pay his bills or other debts. So, instead of going to the bank and wait for a few days/weeks, he can just go to Nexo, use his Bitcoin as collateral, and get the cash that he desperately needs.
When Bitcoin price goes up, he can “pay back” his loans from his salary or whatever, and get his Bitcoin back. Win-win solution for everybody. Of course, we must also acknowledge the risk. If Bitcoin price goes down instead, he still has to pay the same amount of debt, but he will get less value of the BTC once he pays off his debts.
Other potential clients of crypto loans company are the crypto traders themselves. Yes, some crypto traders like to double or even triple their risk, especially in the time of bullish moments. If a trader believes BTC price can keep going up, but he wants to double his risk, he can just use his own BTC as collateral, take the loan, and use the money to buy even more cryptocurrencies.
He can then liquidate his own cryptocurrencies (that he used earlier from the loan) and pay back his debts to get back his BTC. Assuming the price of BTC goes up, he makes double the profit.
This is why crypto loans have the potential to get bigger as cryptocurrencies themselves become more popular. The more traders we have in the crypto space, the bigger the crypto loans industry becomes.
Asset-Backed Cryptocurrencies Open More Opportunities
The good thing about cryptocurrencies is that the use cases keep on expanding. Unlike other industries where things don’t change very rapidly, crypto space is moving at a very rapid pace. Nowadays, we have stablecoins, gold-backed cryptocurrencies, equity-backed crypto tokens, and even real estate-backed tokens as well.
Imagine the potential of the crypto loans industry when you can borrow and lend equity-backed tokens or real estate-backed tokens. The potential of this industry to replace traditional loan transactions suddenly becomes much bigger.
It must be admitted that nowadays, most people who use Nexo or similar sites are just crypto enthusiasts. Nevertheless, in my opinion, the future will be much wider than just what we see right now. Imagine the moment when people borrow or loan money using their real estate-backed crypto token (instead of paper ownership). It’s actually very possible due to how cost-effective the blockchain can be compared to papers.
Where To Start?
If you are interested in trying crypto loans, you can go to nordikcoin.com to buy Bitcoin with your own EUR or USD. Other alternatives include gemini.com and coinbase.com. After you have your own Bitcoin in your own Bitcoin wallet, you can go to nexo.io or celsius.network to test or trial crypto loans, just to see how it actually works in front of your own eyes.