How To Borrow Crypto 🏦 

I Can To Borrow Against My Crypto? 🤔 

A normal loan works like this: you apply for a loan when you don't have enough cash for something you want. The loan provider gives you money and a repayment schedule. Repayment is usually monthly and covers the loan amount plus interest. With crypto loans, you can get a lump sum of money by using your cryptocurrency assets as collateral. Unlike traditional loans, where physical assets are used as collateral, with crypto loans, you deposit your cryptocurrency assets. You still own these assets and benefit from any increase in their market price. There are people with deep pockets who provide loans through borrowing platforms. We'll discuss these platforms later.

Borrowing Crypto In 2024

In 2023, crypto borrowing will be approached more cautiously due to the mishaps of 2022. Following the bankruptcy of Celsius and BlockFi, caused by the Terra Luna collapse, it became clear that the industry is interconnected. The failure of one company can have significant consequences for others, as seen with FTX. As a result, loan providers will increase collateral requirements to reassess their risk strategies. This is because the future growth is expected to come from decentralized protocols, which necessitate over-collateralization. In the DeFi world, borrowing against crypto and NFTs will still be possible, but borrowers will need to offer more collateral or reduce the loan size compared to previous crypto loans.

Pros And Cons Of Borrowing Against Your Crypto

Who Should Borrow Against Their Crypto?

Borrowing against your crypto isn’t for everyone, but for some people, it could be a good fit.

Access the value of your crypto without selling. If you have $10,000 worth of Bitcoin and need $10,000, selling would incur capital gains taxes and potential missed future gains. With a crypto loan, you can get cash without selling your crypto. Enjoy financial privacy with no credit check or nosy bankers. If you're crypto-rich but cash poor, a crypto loan allows you to access your crypto value without selling.

How To Borrow Crypto In 6 Steps

Step 1: Choose Your Platform.

A borrowing platform acts as an intermediary between you, the borrower, and the lender. Think of it as the Ebay for finance—linking people who need money with the financial resources necessary to meet their needs. Unsure about how to select the right borrowing platform? Hang tight; we're about to delve into some of the top choices available and guide you through the selection process in just a moment.

Step 2: Choose An Asset As Collateral.

Great! By now, you should have selected a borrowing platform—excellent! Next, it's time to pledge some of your cryptocurrency as collateral to secure your loan. As previously mentioned, crypto loans are collateral-based. Here are the options you can consider:

• Bitcoin (BTC): This is a widely favored choice. Many platforms accept BTC as collateral, allowing you to obtain stablecoins (coins pegged to fiat currencies like the USD), such as USDC or DAI, in exchange.

• Ethereum (ETH): ETH is another popular collateral option, supported by almost all borrowing platforms. Its value tends to be more stable compared to many other cryptocurrencies, making it a preferred choice for many borrowers.

Loan providers typically steer clear of what could be considered risky collateral. This includes a large swath of today's cryptocurrencies. It's logical, as the collateral underpins the value of the loan. If the collateral cannot be liquidated swiftly or would cause the lender to incur losses upon sale, it’s hardly beneficial. Fortunately, the major cryptocurrencies that dominate the market are generally acceptable as collateral on most loan platforms.

Step 3: Choose A Loan Type.

When you opt for a crypto loan, you generally have two types: interest-only loans and conventional (amortizing) loans, where you pay both interest and principal over time. Each type has its benefits and potential drawbacks.

Interest-Only Loan: In this arrangement, you're required to pay only the interest on the loan amount during the loan term. The principal remains untouched during this period. At the end of the term, you must pay the remaining principal either in a single lump sum or through monthly payments.

• Benefits: Interest-only loans can minimize your payment obligations in the short term, making this an attractive option if you need lower initial payments.

• Drawbacks: Eventually, you may face a significant lump sum payment or higher monthly payments towards the end of the loan period, which can be financially challenging.

Interest and Principal Loan (Conventional Loan): This type of loan involves making regular payments that cover both interest and principal, typically on a monthly basis. This begins soon after the loan is disbursed and continues until both the principal and the interest are fully paid off.

• Benefits: While this loan type doesn’t offer low initial payments, it provides the advantage of consistent payments throughout the loan period, helping in budget management.

• Drawbacks: Although typically less risky and thus less costly than interest-only loans, the consistent requirement for higher monthly payments from the start can be a strain if budgeting is tight. Interest-only loans may appear cheaper initially but generally cost more over time due to the higher risk of default associated with them. This risk is partly due to the loan-to-value (LTV) ratio, which remains high as the principal isn’t being paid down. Should the market value of the collateral decrease significantly, the lender might liquidate the crypto assets to cover the loan balance, posing additional risk in volatile market conditions.

Step 4: Choose What You Want To Borrow.

Earlier, we touched on the concept of loan-to-value (LTV). Here's how it works in practice: LTV is a crucial factor that determines the maximum amount you can borrow. Typically, crypto lending platforms set a limit on LTV at 70% or lower. For instance, if you aim to borrow $7,000, you would need to provide at least $10,000 in crypto assets as collateral.

Keep in mind, opting for a higher LTV not only increases the likelihood of your assets being liquidated in case of market downturns but also generally incurs higher interest rates. To economize on interest costs and diminish your risk exposure, it's advisable to maintain a lower LTV. Aim for an LTV of 40% or less whenever feasible to enhance your financial stability and reduce potential stress.

Step 5. Connect Your Wallet To The Borrowing Platform.

Now that you've completed the initial steps, connect your wallet to the chosen borrowing platform to grant the loan provider access to your crypto collateral. The platform will provide instructions on how to do this.

Step 6: Transfer Your Crypto Collateral.

To deposit your crypto collateral with the loan platform is the final step. Some platforms also offer the option to create a private wallet key with the provider, granting them access to your collateral for potential sale. Depending on the platform, you may receive immediate access to borrowed funds or experience a short delay of a day or two.

Which Crypto Can You Borrow?

Many crypto loans involve borrowing stablecoins like Tether (UDST) or Circle (UDSC), which track the value of USD. Stablecoins hold their value while you move your funds. You can also borrow other cryptocurrencies depending on the platform you choose. Aave, a decentralized platform, offers many options. For example, you can borrow Wrapped Bitcoin using Ethereum as collateral if the platform supports it. Wrapped tokens track the price of a real coin or token, such as Wrapped Bitcoin mirroring the price of Bitcoin on the Ethereum network.

Where To Borrow Crypto?

You have the option to borrow from either a centralized platform or a decentralized finance (DeFi) protocol:

• Centralized Finance (CeFi) Borrowing Platforms: These platforms are operated by organizations with structured management, including teams and boards that handle day-to-day operations and risk management. Despite their structured environment, mistakes can occur, as demonstrated by the collapse of several crypto loan platforms in 2022. Nonetheless, CeFi platforms often provide a more user-friendly borrowing experience, guiding users through the loan process. This is currently the only option if you wish to secure a loan in USD using your crypto assets.

• Decentralized Finance (DeFi) Borrowing Platforms: Unlike their centralized counterparts, DeFi platforms are not managed by any personnel but are run through automated programs known as smart contracts, which rely heavily on complex algorithms. The human involvement is limited to governance votes on platform operations and feature implementations. After these decisions are made, the automated systems calculate loan amounts, collateral requirements, and interest rates using mathematical formulas. While DeFi platforms allow you to borrow in stablecoins or other cryptocurrencies, they do not support borrowing in USD or other fiat currencies.

Best CeFi Crypto Loan Platforms

Think crypto loans could be for you? You’ve got options.

1. Nexo

Nexo's exchange offers 40+ cryptocurrencies for borrowing, using 60+ coins or tokens as collateral. Start by depositing a supported crypto asset and get instant approval to borrow. Funding may take up to 24 hours.

Why Borrow With Nexo?

• Rates on this platform begin at 0% for borrowing and are capped at 13.9%, often making it the most affordable option for securing a loan.

• You have the flexibility to repay your loan using fiat, crypto, or a mix of both, according to what best suits your financial situation.

• The approval process is instant and does not require a credit check. Typically, funds are made available within 24 hours of approval.

Start Borrowing At Nexo

Risks: CeFi Loans

Crypto loans are powerful tools, but like all power tools, they come with risks. Consider these risks for CeFi loans before taking any action.

• Margin Calls: When the market fluctuates and the value of your collateral decreases, it might cause the loan-to-value (LTV) ratio to reach a critical threshold, triggering a margin call. A margin call is essentially a demand from your lender asking you to pay down part of your loan to restore the LTV ratio to acceptable levels. Here's the catch: if you fail to meet the margin call, or if the market drops sharply, the lender may liquidate enough of your collateral to cover the loan balance or to reduce the LTV ratio. It's wise to have an emergency fund on hand to address such situations promptly.

• Platform Insolvency: When you take out a crypto loan, you typically transfer your crypto assets to the loan provider for safekeeping. However, financial difficulties can befall these providers too. If they face severe financial distress, they might halt withdrawals or even declare bankruptcy. Such actions can jeopardize the safety of your crypto, potentially leading to partial or total loss.

• Cyber Attacks: To quote a variation of a famous line from a movie: why do hackers target crypto platforms? Because that's where the money is. Crypto platforms, like banks, are prime targets for cybercriminals. Most loan providers do have insurance against such threats, yet the risk persists. The allure of these platforms filled with digital currencies can be irresistible to hackers, and sometimes, the existing insurance may not cover all losses fully.

• Rehypothecation: Ever heard of rehypothecation? This complex term refers to a situation where your loan provider uses your collateral for other financial activities. This could include lending it to another borrower or using it to fund high-risk investments. The implications of rehypothecation are significant and could expose you to additional risks. Before choosing a platform, it’s crucial to investigate whether and how they might use your collateral for other purposes.

Best DeFi Crypto Loan Platforms

CeFi isn't the sole option for crypto loans. DeFi is gaining popularity and becoming more user-friendly. DeFi loans involve borrowing from fellow crypto users through blockchain smart contracts, bypassing centralized companies.

1. Aave

Aave stands out not only for its catchy name (pronounced "Ah-vay") but also for its user-friendly interface. This DeFi borrowing platform allows you to take loans across seven different blockchains, offering up to 15 different cryptocurrencies for borrowing on each. A potential drawback of Aave is that it often provides loans with variable interest rates. These rates fluctuate based on market supply and demand, meaning that interest costs for tokens in low supply might suddenly increase, which is particularly relevant for short-term borrowers or those utilizing flash loans. Flash loans are quick, fixed-fee loans that must be repaid within seconds, commonly used to mitigate the risks associated with variable rate loans.

Why Borrow With Aave?

• Diverse Blockchain Support: Aave reduces the hassle and cost associated with transferring cryptocurrencies across different blockchains by supporting multiple chains, making it more convenient for users to manage their assets.

• Stable Interest Rates on Popular Tokens: The platform's large lending pools for well-known tokens generally result in lower and more stable interest rates, as the high supply meets borrower demand efficiently.

• Opportunities for Advanced Traders: For traders looking to capitalize on market inefficiencies, Aave’s flash loans offer a prime opportunity to engage in arbitrage, taking advantage of price differentials between markets within a very short time frame.

Start Borrowing At Aave

2. MakerDAO

MakerDAO plays a crucial role in the cryptocurrency space, particularly through its contribution to the popular DAI stablecoin. DAI is designed to mirror the value of the U.S. dollar and is backed by collateral pooled from the community. To access DAI loans, users deposit supported assets such as ETH or WBTC using the Oasis app. While MakerDAO might not be as user-friendly as Aave, it compensates with potentially lower interest rates, which can be as minimal as 0.25% in some cases.

Why Borrow From Maker?

• Competitive Interest Rates: Depending on the asset used as collateral, Maker can offer significantly lower interest rates compared to other platforms.

• Stablecoin Borrowing: Borrow DAI, a stablecoin that is pegged to the U.S. dollar and widely accepted across various exchanges, ensuring ease of trade and stability in value.

• Flexible Management Options: Through the Oasis dashboard, users have the flexibility to re-collateralize or withdraw additional DAI as needed, enhancing the convenience and efficiency of managing their loans.

Start Borrowing At MakerDAO

3. Compound

While it may not be as user-friendly as Aave, Compound offers a similar array of services in terms of crypto loans and borrowing. Functionally, Compound Finance operates much like Aave: loan providers contribute to pools that borrowers can access, provided they have sufficient collateral. Although the selection of cryptocurrencies available for borrowing on Compound is less extensive than on Aave, the use of variable interest rates across both platforms means that shopping around—including considering Compound—could net you a more favorable rate. It's important to note that Compound exclusively supports the Ethereum network.

Why Borrow From Compound?

• Governance Token Incentives: By using Compound for loans and borrowing, you can earn COMP tokens, which grant you governance rights within the Compound ecosystem. This feature not only potentially increases your investment value but also allows you to help shape the platform's development.

• Security and Transparency: Compound's commitment to security is evident through its open-source code, which undergoes regular audits. This transparency helps ensure that the platform remains secure against potential vulnerabilities.

• Flexible Repayment Terms: Compound offers the flexibility to repay loans on your own schedule while interest accrues. This flexibility can be particularly advantageous for managing cash flow and meeting financial obligations without immediate pressure.

Start Borrowing At Compound

4. Alchemix

Alchemix introduces a unique twist to crypto borrowing with what it calls "self-repaying loans." The initial setup for obtaining a loan on Alchemix is standard for DeFi platforms: you deposit collateral and then borrow against it. However, the standout feature of Alchemix is that these loans gradually repay themselves over time. Sounds like magic, right?

The "alchemy" at work in Alchemix involves yield generation and substantial over-collateralization. When you deposit your crypto as collateral, it is put to work earning interest through Yearn Finance. This interest income is then automatically applied to pay down both the principal of your loan and the accruing interest. Additionally, Alchemix typically restricts the loan-to-value (LTV) ratio to 50%, and in some cases, as low as 25%. This conservative LTV cap provides a larger safety margin and reduces the likelihood of liquidation.

Why Borrow From Alchemix?

• Self-Repaying Feature: The standout appeal of Alchemix is that the loans essentially pay themselves off over time, reducing the burden on you and potentially freeing up resources for other investments or expenses.

• Conservative Borrowing Limit: You can borrow up to 50% of your deposited collateral, which aligns with safer borrowing practices and helps ensure that you don't overextend financially.

• Flexible Loan Closure: Alchemix allows you to close out your loan at any time, offering flexibility not always available on other platforms.

• No Lock-in or Fees on Deposits: The platform does not lock your deposits, nor does it levy any fees for using your own assets as collateral, making it economically advantageous for borrowers.

Start Borrowing At Alchemix

Risks: DeFi Borrowing

Similar to centralized finance (CeFi) loans, decentralized finance (DeFi) loans also carry inherent risks, though the nature of these risks is quite different. In DeFi, the concerns aren't about human mismanagement but rather revolve around the mathematical algorithms that govern the platforms.

• Market Volatility and Liquidations: Like their CeFi counterparts, DeFi loans also enforce a maximum loan-to-value (LTV) ratio. If you're using ETH as collateral and its market price drops, the LTV ratio increases, potentially triggering a liquidation event. This means you could lose some of the ETH you put up as collateral. Furthermore, many platforms charge a liquidation penalty, which could exacerbate your losses. Therefore, it's prudent to maintain a conservative approach when deciding how much to borrow, allowing a buffer for price fluctuations.

• Software Bugs: Even well-maintained platforms like Aave and Compound, which benefit from extensive scrutiny by developers, are not immune to software bugs. These platforms' open-source code is constantly examined by developers, akin to ants swarming a dropped ice cream cone. However, a latent bug or one introduced in a new update could cause significant disruptions. For instance, the now-defunct bZx lending protocol once faced an $8 million loss due to a coding error, highlighting the potential risks. Although the funds were reportedly recovered, such outcomes are rare.

• Vulnerabilities to Hackers: Smart contracts are the backbone of DeFi, acting as automated agents that execute transactions when specific conditions are met. However, these contracts are attractive targets for hackers. DeFi platforms are susceptible to exploits; for example, Aave had to halt transactions on the Harmony network after a $100 million exploit that impacted asset values. These incidents illustrate the potential dangers if a hacker manages to manipulate these contracts adversely.

Navigating these risks requires careful consideration and an understanding of the underlying technology and market conditions, especially when engaging with DeFi platforms.

Are There Any Other Fees?

Fees can often feel like unwanted guests at a summer picnic, buzzing around and detracting from the enjoyment. Among the more troublesome ones in the realm of crypto loans are network fees and origination fees.

• Network Fees: These are an unavoidable aspect of cryptocurrency transactions. Whether you're transferring funds or engaging a smart contract, you'll incur a network fee. On the Ethereum network, these fees can become particularly hefty, although alternative networks like Polygon offer a reprieve by significantly reducing these costs.

• Origination Fees: Specific to the lending process, origination fees may be charged as a flat rate or a percentage of the total loan amount. While not all platforms impose these fees, they can be steep when they do—some platforms, for example, charge up to 2% for originating a crypto loan. It’s vital to factor these fees into your financial planning before finalizing any loan agreements.

Always calculate the potential impact of these fees on your overall financial strategy before proceeding with a crypto loan to ensure no surprises down the line.

Final Thoughts 💭 

When your wallet is light on cash but heavy with crypto, taking out a crypto loan can unlock the value of your digital assets without requiring you to liquidate your holdings. Typically, these loans do not necessitate a credit check, and you can allocate the borrowed funds to almost any endeavor. However, similar to conventional loans, borrowing against cryptocurrency isn't without its hazards, particularly the threat of forced liquidations. With strategic planning, however, it's possible to secure financing at a lower cost than personal loans while avoiding intrusive inquiries.