If you own cryptocurrencies like Bitcoin, Ethereum, or BUSD, you may have heard of investment options outside of spot trading such as futures or margin trading. However, this option can also be risky if not traded strategically and carefully.
There are other options traders can consider that use more traditional mechanisms to help investors earn more from their assets.
During stagnant market cycles, holding BTC or ETH can be difficult when funds are needed. More often than not, traders do not want to liquidate their assets for the sake of hodling, and also to avoid triggering a taxable event. So to find funds, the option is to open a crypto loan. In the world of crypto lending, traders can choose between a centralized and decentralized route. But before we get into that, let's define what crypto lending is.
What is Crypto Loans?
The basics of crypto lending are very similar to traditional loans. One of the key factors where they differ lies in how the funds are accounted for. With traditional loans, banks or other institutions use credit scores to calculate the amount of risk they can invest in the borrower. With crypto lending, a credit score is completely unnecessary. Instead, traders can use their crypto assets as collateral to be held by the lender until the loan is repaid.
Apart from these differences, the mechanism behind lending is similar in a technical sense. Crypto loans generally collect interest hourly, not monthly. Also, loan terms can be shorter than traditional loans. With crypto lending, traders can borrow from 7 to 180 days on platforms like Binance Loans. The reason crypto lending operates on a shorter timescale is because cryptocurrencies are much more volatile than traditional currencies, making them riskier for both lenders and borrowers. If the cryptocurrency drops drastically in value, the collateral that the lender takes can be worth much less than the one borrowed. Accordingly, hourly rates and shorter loan terms are applied.
Uses for Crypto Loans
There are several reasons why crypto lending might be of interest to investors. Traders often don't want to liquidate their assets, and when funds are needed, it's a good idea to have the option to open a loan. Another common use for crypto lending is to receive interest on assets. By using a crypto lending platform such as BTC as collateral, traders can then obtain loans in BUSD or USDT (any stablecoin). Collateral will likely be worth more than the loan itself, but once the loan is repaid including interest, the collateral is returned. At this point, BTC may have appreciated, leaving the borrower with a profit.
Another reason to use crypto loans over traditional loans is the speed at which funds can be obtained. BTC loans can be obtained almost instantly, making your crypto assets highly liquid and convertible, to take advantage of market opportunities quickly and easily.
Centralized Option (CeFi) requires KYC, and users must follow the rules. The main attraction for CeFi platforms is that they provide better security and are often backed by reputable exchanges, such as Binance. CeFi platforms often protect crypto assets with insurance or through the use of cold storage.
The Decentralized (DeFi) option offers similar functionality, but typically, the interest rates are not comparable to what is available through the CeFi platform. DeFi does not require any personal identification and can be accessed at any time. However, users have to bear the risk of hacking smart contracts like flash loan attacks.
CeFi and DeFi options are fully transparent and resolved on the blockchain. Also, both usually offer users the ability to create a savings account with them.
How to Borrow Crypto on Binance?
Borrowing cryptocurrency is much simpler than borrowing from traditional financial institutions. In fact, anyone can open a crypto loan even if they have no financial history. On Binance, anyone can borrow a loan, as long as they are a registered user. Also, they can borrow different types of cryptocurrencies such as BTC, ETH, BNB, USDT, and BUSD. A complete list of assets available for loan and collateral purposes can be found here.
Once users decide which assets they want to borrow and how they will provide collateral, they must then determine the term of the loan (7-180 days). Depending on the amount of collateral, the platform will automatically determine the hourly interest rate to be applied.