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Crypto Loans: How to Borrow Cryptocurrencies?

2021-07-26

Key Takeaways:

  • Users can use Binance Loans to borrow up to 65% of their collateral value and loaned funds can be used anywhere. 

  • The main appeal for CeFi lending platforms is that they provide better security and are often backed by a reputable exchange, like Binance. 

  • BTC loans can be acquired nearly instantly, making your crypto assets extremely liquid and convertible, to capitalize on market opportunities quickly and easily. 

If you own cryptocurrencies such as Bitcoin, Ethereum, or BUSD, you’ve probably heard of investment options outside of spot trading such as futures or margin trading. However, these options can also be risky if not traded strategically and with care.

There is another option that traders can consider that uses more traditional mechanisms to help investors make more out of their assets.

During stagnant market cycles, holding BTC or ETH can be difficult when funds are needed. More often than not, traders won’t want to liquidate their assets for the sake of hodling, and also to avoid triggering a taxable event. So to find funds, an option is to open a crypto loan. In the world of crypto loans, traders can choose between centralized and decentralized routes. But before we get to that, let’s define what a crypto loan is.

What are Crypto Loans?

The fundamentals of crypto loans are very similar to traditional loans. One key factor 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 into a borrower. With crypto loans, credit scores are totally unnecessary. Instead, traders can use their crypto assets as collateral for the lender to hold until the loan is paid back.

Aside from this difference, the mechanisms behind the loan are similar in a technical sense. Crypto loans generally collect interest hourly, instead of monthly. Also, the terms for loans can be shorter than traditional loans. With crypto loans, traders can borrow from 7 to 180 days on platforms such as Binance Loans. The reason crypto loans operate on such a shorter time scale is that cryptocurrencies are much more volatile than traditional currencies, making them riskier for the lender and borrower. Should a cryptocurrency drop drastically in value, the collateral a lender took on could become worth much less than what was borrowed. Thus, hourly rates and shorter borrowing terms are applied.

Uses for Crypto Loans

There are a few reasons why a crypto loan may be attractive to investors. Traders often don’t want to liquidate their assets, and when funds are needed, it is useful to have the option to open a loan. Another common use for a crypto loan would be to receive interest on assets. For instance, traders can use BTC as collateral to acquire a loan in BUSD or USDT (any stablecoin). The 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, the BTC may have appreciated, leaving the borrower with a profit.

Another reason to use a crypto loan rather than a traditional loan is the speed at which funds can be acquired. BTC loans can be acquired nearly instantly, making your crypto assets extremely liquid and convertible, to capitalize on market opportunities quickly and easily. 

Centralized (CeFi) options require KYC, and users must follow regulations. The main appeal for CeFi platforms is that they provide better security and are often backed by a reputable exchange, like Binance.

Decentralized (DeFi) options offer similar functions, but usually, interest rates don’t compare to what’s available through CeFi platforms. DeFi does not require personal identification and can be accessed at any time. However, users must bear the risk of smart contract hacks such as flash loan attacks. 

Both CeFi and DeFi options are entirely transparent and resolve on a blockchain. Also, they both usually offer users the ability to create savings accounts with them. 

How to Borrow Crypto on Binance?

Borrowing cryptocurrencies is much simpler than borrowing from a traditional financial institution. In fact, anybody can open a crypto loan even if they have no financial history. On Binance, anyone can borrow a loan, so long as they are a registered user. Also, they are able to borrow various types of crypto such as BTC, ETH, BNB, USDT, and BUSD. A full list of available assets for borrowing and collateral purposes can be found here.

Once the user has decided which assets they would like to borrow and how they will supply their collateral, they must then determine the length of the loan term (7-180 days). Depending on the amount of collateral, the platform will automatically determine the hourly interest rate to be applied. Interest rates are usually lower than traditional loan rates because of the collateral. Through Binance Loans, users can borrow up to 65% of the value of their collateral and loaned funds can be used anywhere. 

How to Repay Crypto Loans

Repaying the loan is simple enough. Borrowers (that use Binance) are required to manually repay the loan via the Order Page. It is important to know that interest is required to be repaid before the principal, such that the borrower doesn’t need to repay the entire principal in one payment. In the case that a borrower can repay early, and the entire amount of principal is paid back, the interest is then charged in accordance with the length in time (hours borrowed) of the loan. Users also will not incur an early repayment fee. 

Factors to Consider When Borrowing Cryptocurrencies on Binance

There are two main factors that you must consider when borrowing cryptocurrencies.

Loan-to-Value (LTV) Ratio is a calculation that tells investors the actual value of their loan as compared to the value of their collateral. This is calculated using index price, which is not the same between coins. Thus, if any two coins were used as collateral of equal value, the LTV would differ between the collateral options. 

Liquidation occurs when a borrower does not repay their loan, even after they are given an extra amount of time from the original due date. If the principal cannot be met, the original collateral is liquidated to cover the loan. A liquidation fee is also incurred from the total borrowed amount (set at 2% on Binance). 

Final Thoughts

If you’re looking to utilize funds beyond your own means, or need to have ‘fast cash’ but don’t want to liquidate your crypto assets, a crypto loan can work nicely for you. With numerous options in cryptocurrencies to borrow and count as collateral, the ability to trade has grown even wider. And since you don’t need to have a credit score to apply for a crypto loan, anyone with crypto-assets can open a loan at will. Not only this, but they can choose how they wish to borrow. DeFi options allow users to borrow quickly and without peer-to-peer interaction. Instead, the loan is completed by a code or a smart contract. 

Centralized options provide users with customer service interactions, insurance for funds, and usually higher return rates for their customers. More personal information is required by these options as well. Binance offers incredibly competitive rates, LTV, and a wide selection of cryptos to work with. 

To get started with crypto loans, make an account on Binance, and experiment to find what works for you!

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