Complete Guide To Borrow Crypto
Crypto borrowing has gained popularity with the increase in cases. The major benefits if you borrow crypto are suspended taxes without the liquidation of your portfolio, borrowing new funds for trading and you can even get short-term lending with flash loans.
Borrow fiat using crypto
The aim of borrow crypto or crypto loans is very simple, to allow crypto holders to have efficient and fast access to fiat funds but without liquidating their portfolios. This has two main benefits. One – there is no need to liquidate your portfolio to get hold of fiat funds that would invite a capital gains tax. Two – you don’t have to sell the crypto assets that you feel will benefit you in the long run.
How does it work?
Though the idea seems simple in theory yet it has some complexities in it. In its simplest and easiest way, you use your crypto as collateral and deposit it, in its exchange you can get a percentage of the dollar value of your collateral in the form of stable currency or cash. You pay the interest on a weekly or monthly basis on what you borrowed. When you pay off all the loans, you get your collateral back.
This appears to be just like a normal loan process, doesn’t it? Well, yes but there is a major difference between a crypto loan and a normal loan why your bank doesn’t accept your crypto assets as collateral? Volatility. A bank will readily accept your house as collateral as they’re aware of the fact that your house would be never less than 80% of its worth compared to what you paid for it, in fact, its worth will only increase with time.
On the other hand, Bitcoin and Ethereum can lose 10%+ worth overnight. What if your collateral’s worth decreases drastically and becomes lower than what you borrowed? Who would want to repay their loan to get their collateral back?
The main difference here is that the loan-to-value ratio is less than the typical financial sector. The loan-to-value ratio here means loan amount/value of collateral * 100.
What are the risks involved in Crypto Loan?
Risk is always involved when you borrow money. There are two risks you should be familiar with before you plan to borrow crypto. How is your collateral stored affects how vulnerable it is to theft. When you deposit your crypto with a loan provider, you’re giving up your control over your asset and now the responsibility is on their shoulders to protect your crypto. Choose a company that has facilities like cold storage wallets, no history of hacks, and insurance. Missing a margin also has the potential to become a big issue because your crypto can be liquidated to pay the loan. If you’re borrowing, this means you don’t want to sell your crypto, so borrow an amount that will let you offer more collateral if necessary. Don’t ever borrow too high a percentage of your whole portfolio.
What are the major benefits of a Crypto Loan?
As we have already mentioned, there are two reasons why should make use of your crypto as collateral. You require cash but at the same time, you don’t want to trigger a tax event. When you sell a portion of your portfolio to get fiat currency, this triggers a capital gains event. Borrowing rather than withdrawing can help postpone the tax event. It also means decreasing your capital gains tax by 50% but only if you keep it for more than 12 months (only applicable in some countries). The second reason is when you feel the value of your crypto will increase in the coming times. Borrowing will fetch you cash without you losing out on the potential gain.
We hope you got a better insight about how crypto loans work and what things you need to keep in mind.