Holding any cryptocurrency has its own intrinsic benefits. If you have already invested in Bitcoin, Ethereum, Cardano, Litecoin or Monero, now is the best time to put your crypto reserves to good use. Crypto holdings can be used as collateral for a loan, even if you have a small crypto portfolio. Which is why, there is plethora of crypto lending platforms that have emerged in the last few years with the recent Bitcoin and crypto boom.
In traditional financial markets and banking systems, this practice is called securities-based lending. However, it is usually reserved for large financial institutions and high-net worth clients of banks. Not ordinary individuals like us. With the advent of crypto lending platforms, any individual, irrespective of their net worth can both offer and apply for loans which are much more accessible. Hodl investors of any nationality can achieve liquidity and maximise their profits from their crypto investment without selling them.
However, choosing the best crypto lending platforms is crucial in this regard. You may also want to check out this in-depth guide on Crypto Lending. Down below, we have done a rundown of 8 of the best crypto lending platforms, their advantages, risks, and the impact of bitcoin and crypto loans on taxation. Crypto loans are a means for traders to liquidate their crypto holdings without selling their cryptocurrency.
These loans are issued on crypto lending platforms. They could also take out a crypto loan if they want to hold the asset for a long duration to avoid short-term capital gains tax. All loans pertaining to Centralized finance or CEFi are custodial in nature. That is, a central entity or platform is the sole incharge of the collateral until the loan is paid out.
It is estimated that around 80 percent of crypto loans issued today are custodial. Although CeFi crypto loans are far more affordable and accessible than traditional loans, they still depend on a centralized platform to enforce their terms and conditions. All loans pertaining to Decentralized finance or DeFi are non-custodial.
Such loans depend upon smart contracts instead of a central organization that enforces the terms of the loan. DeFi loans have a higher interest rate than custodial loans. Generally, DeFi lending platforms cannot directly lend fiat currency hence traders receive stablecoins that can be exchanged for cash. Applying for a crypto loan is very easy in a stark contrast to applying for a traditional loan.
Credit checks are not required. However, the amount of the loan that you seek depends upon the amount of collateral you are able to offer. Crypto loans depend upon the loan-to-value LTV ratio. LTV is the ratio between the total amount of the loan issued and the value of the collateral that you offer.
It lets users put up an asset as collateral that can be offset by either minting a certain amount of DAI or paying back the loan in full before unlocking their crypto assets. Compound is one of the best DeFi crypto lending platforms where users directly supply cryptocurrency to the protocol and reap interests on their deposit. However, this cToken supply balance can also be used as collateral for a loan. Aave is an innovative protocol with a wider range of loan options than other large protocols.
Like Compound, borrowers put up collateral that is used to support the protocol; their contribution is represented in aTokens. It boasts a higher LTV rate than other large competitors and very low borrowing rates. Aave is the highest valued DeFi lending project because of its perceived dynamism and innovation.
The smart contract then transfers the deposited assets into a Yearn vault that mints DAI. Alchemix users can mint an alUSD coin worth up to half of the asset they deposit. Although it currently only accepts DAI deposits, it expects to accept more stablecoins soon. Nexo typically has slightly higher LTV rates and slightly lower borrowing rates. It supports 18 currencies. Among CeFi lenders, Unchained Capita l stands out because of its multisig collaborative custody model, which gives borrowers more transparency into their assets and increases security.
In this system, accessing collateralized assets requires three private keys. One is controlled by the borrower, one by Unchained Capital, and one by a third-party key agent. Unchained Capital only offers bitcoin loans and only lends in the United States.