This article contains 4 reasons why crypto lending is a good idea, despite the volatility of the crypto market and risky lending platforms.
At the time of writing, there has been a ‘big fuzz‘ in the crypto markets according to crypto lending platforms. Moreover, one of the biggest crypto lending platforms Celsius has filed for bankruptcy leaving many crypto investors in the dust.
Particularly, back in June 2022, this platform paused all crypto withdrawals and swaps on their platform. All this while suffering from liquidity issues. Additionally, it turned out that this lending platform was declared insolvent and couldn’t pay its creditors.
On top of that, there were related issues with Voyager Digital and Three Arrows capital that also collapsed on this Celsius debacle. As a result, in just a few weeks, billions of dollars disappeared from the entire crypto market.
With the bankruptcy of Celsius in mind, is crypto lending a good idea? For me who has been in the cryptocurrency markets for many years now, this is a legit question. Also, I’ll try to explain why crypto lending is a good idea. Notably, this is based on my own experiences with crypto lending platforms.
Of course, I’m not a financial advisor. Therefore, you should also do your own research before following any advice you read online. Given that, in this article, I’ll explain to you the benefits you can have when using a crypto lending platform like Nexo or Youhodler.
What is Crypto Lending?
To explain crypto lending best you can use this example from traditional finance when applying for a loan. In traditional finance, good examples of getting a loan are a mortgage or a loan to finance your new car.
To acquire the loan and to be considered trustworthy you have to come with collateral to cover the risks for the lender. Additionally, for a mortgage, this will be the house you are buying, or for a car loan, the car is being financed.
Similar when financing a mortgage, you can use your cryptocurrency like Bitcoin, Ethereum, or any other to use this as collateral for the loan. After all, when things are going the wrong way, the lender can claim the crypto to cover the expenses.
In other words, you use your crypto(BTC, ETH) as collateral by depositing to these crypto lending platforms. In turn, you can get a loan in just minutes without any further questions asked.
What Happens When you Lend your Crypto? What’s the Process?
To clarify crypto lending even more, here is a more detailed approach to how the process of crypto lending in general works. First of all, you need to deposit your cryptocurrency to a crypto lending platform(CeFi) or decentralized contract(DeFi).
Notably, in this article, I’ll use centralized crypto lending platforms as an example. However, the more advanced crypto users can use DeFi platforms like Curve, Compound, or Aave as well.
Transferring Crypto between Wallets
📣 Pay attention! If you are already familiar with sending crypto between wallets you can skip this and move to the other chapter. There I’ll explain why crypto lending is a good idea even after the recent market turmoil.
For transferring your cryptocurrency to a crypto lending platform you need to create a wallet address at their platform first. In addition, you can do this by creating a free account at Nexo or Youhodler.
Both platforms require you to do an account verification process first(KYC) by uploading identification documents. After this sign-up process, you are ready to go and can start sending crypto here.
How does depositing crypto at these platforms work? Below, I’ll explain the process between Binance and Nexo but this can be done between any crypto wallets(platforms) you are using.
Create a Crypto wallet at Nexo(Top up)
For the simplicity of this example, I assume you want to use some Ethereum(ETH) to get a loan on Nexo. At this point, you want to send it from Binance(or any other) to Nexo. How to do this?
- At the Nexo, platform find Ethereum under the ‘Assets‘ tap
- Choose or click ‘Top up‘ button
- Choose ‘Ethereum(native) network‘
- A new window appears showing the deposit address
- Now copy this address(e.g 0x678B17F0146013057c0973141E0d2f98FF13B09D) to your clipboard.
At this point in the process, you are done on Nexo and you need to go to Binance from here. So login to your Binance account or any other exchange you are using.
- At Binance go to your ETH funds(wallet)
- Click on the ‘Withdraw‘ button
- Paste your Nexo address in ‘Address‘ field
- Choose ‘Ethereum(ERC20)‘ for network
- Finally, click Withdraw button and confirm the e-mail sent to you.
That’s it! At this point, your ETH is underway to the Nexo platform and once it receives your wallet address you can start lending money in seconds. On top of that, you will receive 8%(APY) in additional ETH for just holding your ETH there 😊
4 Reasons Why Crypto Lending is a Good Idea
As explained earlier, you can use your crypto as collateral to get a loan on crypto lending platforms like Nexo or Youhodler. Particularly, the way this works is that you deposit crypto and can get a loan for about 50% of the value of your holdings.
So why is it smart to borrow funds against your own holdings instead of cashing out your crypto?
#1 Never Sell your Crypto Holdings
If you are in crypto for the long run like me(HODL) you don’t like to sell your funds for fiat currency. However, the market cycles in the crypto space are bumpy. In fact, when we are in a bull market cycle it’s very tempting to sell if your crypto portfolio is up 500%.
So how can you enjoy the party without the need to sell all your funds? I think you already know what’s coming here, but why not lend out your funds for real cash?
The big benefit of borrowing against your own funds is that you can enjoy the party when prices are going up. Additionally, you keep the owner of your funds and you keep benefitting when prices continue to go up.
Remember at some point in time if you want to withdraw your crypto, you must first pay back the loan you acquired. After this, your funds will be 100% available and ready for withdrawal.
#2 Getting a Loan is Easy(No Bureaucracy)
After you have created an account at Nexo or Youhodler the annoying bureaucracy will be over. This is contrary to getting a loan in traditional finance where often credit score checks or proof of payments(bank) are required.
The big benefit of crypto lending platforms is that you can get a loan easily by just depositing the requested amount of crypto. For example, if you want to get paid in stablecoins like USDT or USDC this can be done within minutes. For sending fiat currency(USD, EUR) with wire transfer it normally takes 1 to 3 business days depending on your bank account.
After all, you will be surprised how smooth this process is compared to the extensive procedures traditional lending platforms working with today.
#3 Crypto Lending Platforms are Very Flexible
Another reason why crypto lending is a good idea is the built-in exchanges. As mentioned earlier the crypto market cycles can be very bumpy and volatile. Therefore, many crypto lending platforms are offering additional functionality besides lending and earning. A good example is the built-in exchanges where you can swap your crypto for stablecoins.
Of course, if you are a HODLER you never want to sell your crypto if possible. Nevertheless, if you have been in crypto for a few years like me, you know that it can be tough to go through another crypto bear cycle.
In other words, when prices are down 80% from the last ATH it really can be a suffering to hold on to your funds and wait for it all out. Instead, crypto lending platforms like Nexo offer you to switch/swap to stablecoins when markets turn against you. On top of that, you’ll keep on earning interest over your holdings(12% APY) without the need to worry all the time.
#4 Earning Interest over your Crypto Holdings
Last but not least, the earning part most crypto lending platforms are offering. Moreover, just holding your cryptocurrency at the crypto lending platform allows you to earn interest or additional cryptos.
This earning process also continues when you have borrowed money or stablecoins against your crypto portfolio. This means, that when markets go up you still will be the owner of your funds. On top of that, you will be earning interest for just holding crypto there. A win-win scenario 🙂
Maybe you are thinking that this sounds too good to be true and aren’t there any downsides to crypto lending? To clarify, crypto lending comes with some risks you should know about before starting this process.
The first thing is that lending money or stablecoins isn’t for free and it will cost you about 1% a 1.5% APY. Also, you must realize that if markets turn against you and you can’t pay back the funds borrowed you can lose a big part of your crypto collateral. At Nexo, they reduced this risk by setting the Loan-To-Value(LTV) at 50%. At this rate, the chance is very low of being liquidated for 100%.
Youhodler on the other hand uses a Loan-To-Value of 90% where you have the possibility to take higher risks and higher loans. Remember that if the markets turn against you it can be hard to maintain your initial crypto portfolio if you have fully borrowed for 90%!
Wrapping it Up
Is crypto lending a good idea with the current crypto market conditions? The crypto markets in general are full of innovation, risk, and opportunity and continue to do so. The use of crypto lending platforms is no exception to this.
However, for long-term cryptocurrency investors(HODLERs) crypto lending platforms can be very profitable if you pick reliable ones. In summary, the benefits of using crypto lending platforms:
- No need to sell your funds to be profitable
- Getting a loan is very easy
- Crypto lending platforms are very flexible
- Earn interest over your crypto holdings
Is There a Risk To Crypto lending?
As with any investment opportunity, crypto lending comes with some risk. First of all, there is the volatile nature of the crypto markets. If you decide to borrow at Youhodler up to 90% of the LTV you have also a higher chance of risking liquidity loss. Meaning, that at a liquidity loss you will lose all crypto collateral that was backing your loan.
Remember that using a crypto platform has benefits but nothing comes for free. Therefore, it’s wise to study the platforms well to exactly know what you can do before depositing your funds.
Is Crypto Lending the same as Crypto Staking?
Most crypto lending platforms like Nexo and Youhodler are offering interest when holding funds in the wallets. This is similar to staking crypto where you also can earn crypto by locking up funds.
However, crypto lending and staking aren’t the same where crypto staking requires holding special types of coins(PoS). Also staking is less risky as your funds can’t be liquidated.
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