The cryptocurrency industry has evolved very fast. At the start, people were hesitant to accept cryptocurrency, but now cryptocurrency has gained use cases in almost every industry. Crypto lending is one of the latest trends in the crypto industry that has gained massive popularity over the past few months. A large number of investors are joining lending platforms to earn money on their idle crypto assets. There are many lending platforms out there that allow investors to invest their crypto in lending.
Here in this article, we have discussed a few things that you must consider before investing in crypto lending platforms.
So, let’s get started!
What is crypto lending?
Before funding, crypto lending platforms you should explore what it is, how crypto lending works, what kind of things you ought to consider before investing in it, and what kind of benefits you will have after the investment. Crypto lending is an investment form that allows investors to lend cryptocurrencies to borrowers in exchange for interest. Borrowers deposit their cryptos as collateral which serve as security for the lender’s investment.
A borrower cannot use his cryptos which are deposited as collateral until he repays the entire loan amount.
Things to consider before investing in a crypto lending platform
Crypto lending is rewarding, but there are also risks associated with it. Therefore, you need to be careful. The following are few things that you should consider before investing in crypto lending, keeping yourself safe.
1. Always do your own research
When you are in the crypto industry, it is always recommended that you do your own research before making any decision. The same is the case with crypto lending. Doing your research before investing in a crypto lending platform can save you entrust any scam.
Therefore, you should always do your research to check all the security details of a lending platform and choose the one that has a good security record.
2. Don’t rush
If you want to sell your cryptos soon, then do not lend out. It is because you cannot cash out the assets that you have lent out to the borrower.
Therefore, do not be in a hurry when you invest in crypto lending.
3. Know the parameters
You should make sure that you have a backup plan if the borrower fails to pay you back. Check beforehand how the platform, you are using will recover the loss through insurance or the locked collateral.
Among parameters, also consider the time when you will get your cryptos back and the percentage of interest on your investment.
4. Choose platform wisely
Cryptocurrency exchanges provide lending services acting as a middleman between borrower and lender. A lender sends his cryptos to the platform to make them available for lending. When the borrower pays back the loan amount, the lender receives his funds back to an address on the same platform. It means you depend on the platform, and your cryptos are under their control until you manually withdraw them.
As you are entirely dependent on the platform in crypto lending, therefore, you must choose a well-reputed and trustworthy platform. Also, make sure the platform you choose has a recovery system if your assets are lost or compromised.
5. Follow the market changes
Cryptocurrency is highly volatile. Sudden up and down in prices is common here. Always make sure to follow the price changes. It can significantly help you. For example, if the price of your crypto reaches the targeted price of the loan, you can immediately clear the loan and get back your coin to sell them at a profit.
6. Loan to Value (LTV)
For cryptocurrency loans, the loan to value is generally 50% to 70%. It means if you need to borrow $5,000, you will have to deposit cryptos worth $10,000 if LTV is 50%. This way, a lender’s investment is always protected.
Make sure what is the LTV value a platform is offering before choosing it.
Using cryptocurrency as collateral to get a loan is not considered a sale in the crypto industry; therefore, there is no tax. However, the interest amount and the loan fees are subjected to some form of taxation.
Always check how much tax you will have to pay before investing in a crypto lending platform.
Being fast and flexible, crypto lending is an innovative alternative to a traditional bank loan that follows a lengthy process. That is the reason people are adopting them increasingly. However, the crypto industry is known because of its unique features and volatility & scams at the same time. Therefore, the only way to protect yourself and take advantage of this industry is to be active. Take each step carefully and wisely.
You need not fear this industry. Just be cautious and ready to earn significant returns!