What is a bitcoin loan and how does it work? – Pros & Cons
What is a Bitcoin Loan?
Bitcoin loans are pretty much like any other loan where you can borrow specific amounts from a lender and pay them at certain interest rates. The only difference is that in this type of loan, cryptocurrencies serve as your collateral or the item or asset used to secure the loan.
The rapidly changing value of Bitcoin is the clear reason why it isn’t easy to just borrow Bitcoin from someone you know. In cases like this, the lender and borrower need reassurance that the requirements from both parties can and will be met. So if you want to either borrow or lend crypto securely and reliably, exploring crypto or Bitcoin lending platforms might be the most appropriate solution for you.
How does Bitcoin lending work?
A bitcoin-backed loan uses digital currency as collateral, similar to a securities-based loan. The basic principle works like a mortgage loan or auto loan — you pledge your crypto assets to obtain the loan and pay it off over time. You can get this type of loan through a crypto exchange or crypto lending platform.
While you retain ownership of the crypto you’ve used as collateral, you lose some rights, such as the ability to trade it or use it to make transactions. Also, if the value of your digital assets drops significantly, you may end up owing back much more than you borrowed should you default on the loan.
People may consider crypto loans because of the benefits they provide and because they have no intention to trade or use their crypto assets shortly. The acronym HODL, which stands for hold on for dear life, is a common refrain in crypto-focused online forums.
Advantages & Disadvantages
|Bitcoin lending involves borderless online transactions and it is one of the pioneering cryptocurrencies to be accepted in almost every part of the world.||Bitcoin lending faces tough competition from other emerging crypto lending services.|
|Bitcoin runs on a decentralized blockchain and is not controlled by any central authority. Due to its decentralized nature, BTC assets are not vulnerable to the governance-based manipulation of political bodies, banks, and other financial institutions.||Bitcoin lending faces issues due to the infamous volatility of BTC prices. If the price drops dramatically to an all-time low, the Bitcoin lending platform faces complications in serving its lenders and borrowers. Therefore, this unpredictable price swing makes Bitcoin lending risky for investors.|
How do you get a Bitcoin loan?
To get a Bitcoin loan, one can browse through multiple Bitcoin loan sites. These websites are the Bitcoin lending platforms that can provide instant Bitcoin loans to their users. In these platforms, the process of lending Bitcoin in the form of cash loans is simplified in many ways. This is done to make Bitcoin loans more accessible for the greater public. By following these steps, one can get a Bitcoin loan without losing time on traditional loan procedures.
Step 1 – Select a Bitcoin lending platform Step 2 – Create a user account by verifying the trust score and cryptocurrency support Step 3 – Select the type of Bitcoin loan based on the collateral requirement, interest rate, DeFi/CeFi, etc Step 4 – Submit the loan application or accept the loan offer and get the loan in a few hours after the borrower accepts the loan terms
Important things required for Bitcoin loan application
- Proof of being a registered user of the lending platform
- Documented proof of age (18+ years)
- Digital verification of email and phone number
- Documented proof of Bitcoin holdings (crypto wallet, crypto exchange, etc.)
Applying for Bitcoin loans is easier for registered users of crypto lending platforms. Moreover, it is easy for registered users of leading cryptocurrency exchanges such as Binance. Such users have enough verified data to prove their identity during the application. While borrowing crypto loans, it is equally important to check the cryptocurrencies and the fiat currencies supported by the Bitcoin lending platform.
With all the things we’ve discussed so far, you’re probably thinking about whether trying your hands on crypto loans is a good idea or not. So here are other key points you might want to look into to help you come to a decision.
If you’re a newbie in the crypto space and want to have fractions of BTC by not taking the trading route, you can opt to borrow Bitcoin to get started. Sending and receiving money through cryptos is much cheaper and faster than with many banks and other third-party financial institutions.