Loans

Crypto Collateral on Loans Can be Prohibitively High; Here’s How to Fix It

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Written by Publishing Team

For those investors who “hold” – from enthusiastic beginners to whales with a diversified cryptocurrency portfolio – one issue of buying and holding cryptocurrencies is liquidity.

While we all want to have enough wealth to throw huge amounts of money into cryptocurrency and still have plenty of cash for things like starting a business, buying houses/cars, or sending kids to college – sometimes that just isn’t possible. The challenge for cryptocurrency believers is to strike an optimal balance where they can invest as much as possible in cryptocurrencies, while still maintaining sufficient cash to follow through on purchases, expenditures, and other investments. If investing in cryptocurrencies is too aggressive, they may suddenly have to sell a part to pay an expense, and they may get caught when their token values ​​drop. If they are too conservative, they may put aside more banknotes than necessary and miss out on a significant increase in the value of the token.

One potential solution that has emerged is the crypto loan model. Basically, investors can put cryptocurrencies as collateral for a cash loan, and ideally they have the best of both worlds. This sounds like a great solution, and it certainly can be, but as with all things, the devil is in the details. Let’s examine some of the major advantages and disadvantages of crypto loans, and explore why they can really solve the crypto/fiat balance dilemma. We will consider what terms should go along with the best case scenario that happens, and what the consequences will be if a crypto loan goes wrong. Specifically, let’s take a look at the biggest flaw in crypto loans — the 2x-3x collateral required — and how interesting tweaks to the model, such as Roobic’s lending structure, might be able to mitigate the problem.

Pros and Cons of Cryptocurrency Loans

Cryptocurrency loans can be very effective in providing liquidity to cryptocurrency holders without the need to sell tokens. As long as the token values ​​are relatively stable, the use of loans can open the door to those who need the cash and can eventually repay it. There are additional perks of crypto loans that make them highly desirable for borrowers. Unlike a traditional loan, a cryptocurrency loan does not require a credit check. This is a game changer for those who have no credit or bad credit and perhaps the only way to secure a loan for some. Several loans can provide cash on the same day, which is amazing when compared to the weeks and sometimes months required for traditional loans. The most telling feature – even for those who have great credit and don’t need cash right away – is that many crypto loans have low interest rates; Some even offer a 0% interest rate.

This last point might just make you wonder how these lenders make money. And you are right to question this because, unlike a traditional loan, interest earned is not the main revenue stream for lenders. Instead, these lenders provide loans to their clients because there is a chance that they will be able to collect the required collateral if the market conditions are right. This is because cryptocurrency loans are secured by collateral in the form of crypto tokens. Unlike a home loan, where the home is the collateral and has a strong chance of maintaining or increasing its value over time, digital currencies can fluctuate significantly. A token can drop in value by half overnight, and for no apparent reason. For this reason, lenders want to ensure that the collateral can cover the loan amount with a high probability and will demand 2-3 times the loan amount at a crypto-equivalent value.

This is where the highest risks for borrowers – and the greatest revenue opportunity for lenders – come to the surface. Part of the crypto loan contract states that if the value of the collateral drops below a certain point, the borrower must immediately pledge additional cryptocurrencies as collateral to cover the value of the loan. If the borrower cannot provide this, the guarantee will be forfeited and additional penalties can be applied. The volatile rates and potential big losses make cryptocurrency loans seem less like the perfect loan and a more high-risk way to get cash – losing cryptocurrency and fiat alike, simply because the unpredictable cryptocurrency market is plunging, even for a short time.

A Possible Solution for High-Risk Cryptocurrency Loans

In short so far, crypto loans can be amazing due to no credit checks, same day cash and low/no interest rates. It can be a disaster if the value of your crypto collateral drops 2-3 times past a certain point and is forfeited to the lender. At this point, many crypto loan basics articles will direct readers to safer alternatives such as credit union loans, 0% credit cards, or loans secured with more stable collateral. But none of this meets the needs of an investor who wants to profit from his investment in cryptocurrency. Does this mean crypto investors are stuck with a 2-3x guarantee? Well, according to loan platform Roobic, maybe not.

Roobic’s lending philosophy is less conventional than most platforms because it has developed what can be described as a marketplace for cryptocurrency loans. Instead of requiring very high collateral for all loans to minimize their risk, they allow lenders to reach out to borrowers based on the terms of their loans. If a lender wants to provide a loan to someone who requests it, he has to decide how much collateral is required. This may be higher for collateral based on highly volatile tokens, but it may be much smaller if the lender is eager to find a borrower and is comfortable with lower collateral. The key is that lenders and borrowers can find a match, and a much wider range of loans can be successfully deployed, potentially improving the overall market.

wrapping

Cryptocurrency loans are a new way to get your cryptocurrency and at the same time run it through secured borrowing. With many benefits like getting cash quickly, no credit checks, and low or no interest, there is a lot to like. However, the sticking point of 2-3x the collateral on cryptocurrency can be too risky for many. Will Roobic’s solution for matching borrowers and lenders based on collateral amounts create more value for the larger crypto economy? It’s too early to tell, but the concept is interesting enough to watch and could become a new opportunity for both borrowers who want to risk lower collateral, and individual lenders who want to jump into the market but don’t have the infrastructure to attract borrowers. With any luck, this is another representative step towards making the larger crypto industry an open market, a decentralized and revolutionary global economy.

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