The opportunity to take out a loan, leaving your cryptocurrency (bitcoin loan) as collateral, is gaining popularity – investors see it as a convenient way to use money without selling their crypto at the same time.
There are quite a lot of companies that provide borrow against crypto now. Each of them has its own strategy, although the idea is the same:
- The user invests cryptocurrency as collateral in an automated smart contract.
- In return, cryptocurrency or fiat funds are issued at a certain percentage.
- The contract automatically accrues interest and prevents third parties from interfering in the process.
- As a rule, such loans are perpetual, you can repay them in parts or repay them in full at any time.
- After full repayment, the cryptocurrency is unlocked and it can be withdrawn.
The demand for loans secured by cryptocurrencies is growing for several reasons – low interest rates, a convenient way to manage funds for traders and investors, as well as minimum requirements for the borrower – in most cases, you do not even need to confirm your identity.
A loan secured by cryptocurrency implies the issuance of funds to the borrower based on the value provided by them. The value in this case is the cryptocurrency. Before the expiration of the term, the borrower must fully repay the loan funds and the interest accrued during this time, otherwise he loses his collateral.
Due to the volatility of the value of digital currencies, the collateral rises and falls in price, so the loan amount is fixed in traditional money. If the BTC exchange rate has increased during the loan, then the borrower makes a profit on the return of his collateral. The loan itself, as a rule, can be obtained in fiat or crypt.
The terms of the loan (LTV ratio, maturity dates, interest rates, possible terms, etc.) are set by platforms that provide such services; they also organize the safe storage of funds – either on their accounts or in the form of independent smart contracts. If the platform is organized in the form of p2p, then the conditions are set not by the management, but by the lenders and borrowers themselves in the process of contracting with each other.
As for the required documents, if the platform does not keep funds and collateral, then passport data is usually not needed. Otherwise, the KYC procedure is carried out, which is verification by identity card, and in some cases, residential addresses.
Sources:
https://www.tapatalk.com/groups/wmforum/borrow-against-bitcoin-t540.html
