How Does A Bitcoin Loan Work?

How Does A Bitcoin Loan Work?

Bitcoin is storming the payment market. Its success lies due to the transparency and ease of use it offers. Here we will tell you how Bitcoin loans work.

Bitcoin users are often told that they can “HODL” their assets. But, no one wants to keep their money to gather dust in an account. Similarly, people look for options so that their Bitcoin grows with time. This raises the question of “how you can make your bitcoin grow” without any effort.

The answer lies in Bitcoin lending. There are multiple uses to it. The user gets interested when he lends his bitcoin, which increases his earning. Plus, he can use it as collateral and get a loan for himself. Let us know about Bitcoin loans and how they work.

Advantages of Bitcoin loans

Before anything, let us first understand the advantages that Bitcoin loans offer.

Ease of getting

It goes without saying that getting a Bitcoin loan is comparatively easier than a standard bank loan. When you go for traditional loans, they will check your credit score. If your documents do not fulfill their conditions, it is unlikely you will get the loan. But to avail of a Bitcoin loan, your credit score is not essential.

In fact, you do not even need a bank account to receive the amount. People get funds that they can use for further work. To know more, you can visit coinlive.io and get all your doubts clarified. 

Quick process 

Most banks take a reasonable amount of time before they process your loan. This is primarily because they require lots of paperwork formality finished and then only, they transfer the money.

However, with Bitcoin loans, you get the cash within 24 hours. So, if you are looking for money for an emergency, Bitcoin loans are the better option. 

Flexibility in loan terms 

When it comes to payment terms, Bitcoin loans are flexible in comparison to traditional lending. The borrower decides the duration of the loan, loan to value ratio, and the currency they want to be paid in.

The loan amount is the only factor that is determined by the collateral you provide. Some loan providers also offer flexible repayment options, so you do not have to worry about that aspect too.

Explaining Bitcoin loans 

Bitcoin lending zoomed during the pandemic. Many people started looking for ways in which their digital assets could prove helpful to them. Let us explain to you Bitcoin loans with an example:

Bob has 3 BTC, which he does not want to sell. He knows the prices will rise considerably in the future. However, at present, he also needs money instantly.

Here Crypto lending platforms will come to his rescue. He can use these Bitcoins as collateral and get a loan in stable coins.

Now when he pays his loan and interest back, he will receive his 3 Bitcoins back. Since the prices of Bitcoin have increased since then, he is appropriately rewarded. Not to mention that his temporary problem of money availability was resolved.

Different from personal loans or credit card loans, these loans on collateral are safer. They also come at lower interest rates as opposed to other alternatives. BTC is very volatile; hence these loans are always “overcollateralized.”

This acts as a sort of insurance in situations if the price of Bitcoin declines sharply. But this may have a negative impact on the borrower, especially if their platform expects them to maintain Loan to value ratio.

How you can get a Bitcoin loan

Now that we have understood what a bitcoin loan is, it is time we analyze how to get one. There are two types of platforms to get a Bitcoin loan.

·       Centralized lending platform

·       Decentralized lending platform

Some examples of Centralized lending platforms are BlockFi, Nexo, and Binance, and they want you to follow specific rules to get the loan. You will have to create an account first at these platforms. Next, you have to complete the “Know your Customer” formalities so the loan can be processed.

These platforms also have protocols to ensure that the collateral remains safe. Some protect the BTC through insurance, while others keep the majority of them in digital storage. Centralized crypto lending platforms still record the deposits and withdrawals.

The rate of interest offered is around 8% which is relatively high compared to what regular banks provide. There is also more paperwork involved in this case. But since these platforms are better regulated, the borrowers find them a better option.

On the other hand, the Decentralised lending platforms have transactions handled by codes and not by people. In the case of such platforms, intelligent contracts use algorithms to process loans and automate the process. Anyone can access the protocols of these platforms. There is no middleman or regulator, so there is no KYC process here.

Here the only con is that the interest rates offered are less compared to what a centralized platform can offer. Getting any kind of loan from such platforms is pretty straightforward. You do not have to provide any paperwork. All the customer does is apply for the loan, give the crypto, and the loan is processed through smart contracts.

The users of decentralized platforms can apply for a loan of any amount. They do not have to confirm their identity to anyone. On specific decentralized and centralized platforms, the user can just open an account using crypto, take loans, or trade tokens.

Conclusion

Bitcoin use is increasing every day. As the pandemic entered the scene, the need to take loans against this cryptocurrency increased. It will, however, take some time before this concept gets universal acceptance.

No one knows how things will move ahead in the future. Both platforms have their share of pros and cons. It is purely the decision of the user what he wants to do.

In the coming years, the BTC will become a worldwide accepted currency. Until then, we should let things move at their own pace. Hopefully, these transformations would benefit the customers and platforms in a balanced way.

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