Crypto Lending Primer
Photo by The New York Public Library on Unsplash

Crypto Lending Primer

If you’re a long-term believer in the cryptocurrencies you hold, you may want to consider lending it out for a respectable rate. Cryptocurrencies, like fiat currencies, are similar in that a person can give their holdings to another with the promise of being paid back, plus some interest. What’s particularly enticing about loaning cryptocurrency, compared to fiat, is that the rates are far more attractive, sometimes as high as 6 or 7 percent annualised.

How Does it Work?

If you feel that lending out your cryptocurrency is the way to go, you might be wondering how to go about it. After all, borrowing fiat currency as a borrower is fairly straightforward, but it’s not everyday the average Joe is lending out his money to people other than friends and family, and of course sometimes Uncle Sam by way of treasury securities.

Similar to fiat, you can lend your crypto to others by using a cryptocurrency lending platform, like Nexo or Bankera. Oftentimes, the only cryptocurrencies you’ll be able to lend out are the established ones like Ether, Bitcoin, and select Stablecoins, but different platforms have different policies with regards to what cryptocurrencies can be lended.

Why Should I Loan out My Crypto?

Many of us have likely had a poor lending experience, in which a friend failed to pay back that fiver you gave them years ago, or that family member turned that short term borrowing into a long term “gift.” Lending crypto, however, comes with a host of benefits that are likely to attract people looking to make a little extra passive income, especially if they have no plans on selling their holdings. Since you still own the crypto, any gains you make will be yours to keep as well. Furthermore, the rates tend to be considerably higher, sometimes as high as 8 percent, because of the volatility associated with the underlying currency.

Ultimately, a lender has three different ways they can lend their cryptocurrency: investing in individual loans, lending to a firm that then lends that money out to others, or using a bot that automatically lends out your money based on a set criteria.

Investing in individual loans is something most of us are familiar with. Much like when you give a friend or a family member some money when they’re in a pinch, you can also choose to lend your crypto to another individual. You set a rate that you’re interested in, and borrowers can choose to take you up on your offer. This sort of service is offered by platforms like LendingBlock.

Lending your crypto to a firm, that then lends out your money to others, is one of the most popular options by cryptocurrency lenders. Instead of determining who is a suitable borrower, you simply entrust your crypto with a cryptocurrency firm, and they do the legwork of matching and dispersing the funds to potential borrowers. In the crypto lending world, there are two major ways to play the game: you could either trust a particular cryptocurrency firm to disperse your funds, or you could have faith in the smart contract system to keep your cryptocurrency safe. While both are valid methods to use, it comes down to your preference on which type of method you’ll want to go with.

If you’ve got a significant amount of crypto you're holding on to and don’t mind losing access to it for a month or more, lending out your crypto could be a decent way to add a little extra passive income.

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