You might be familiar with the concept of collateral. It is something of value that you put up when taking out a loan. In our traditional financial system, this could be your house, your car, or anything else that the bank/lender finds to be of value. This so-called collateral will function as some sort of insurance for the lender. Because when you can not afford to pay back the loan. They will have the right to sell your house, car, or other assets. So that they may get back their money.
In the traditional ways you can put many things up as collateral like stocks, houses, and cars, but can you also put up crypto? Can your Bitcoins serve as your collateral to take out a loan?
Well yes, they can serve as collateral for a loan. In this blog, we will take a look at how crypto can be used to take out a loan, for what kinds of things you can use it as collateral, and how you do this.
This way you will not have to sell your precious cryptos but can still finance some of the things you would otherwise not have the capital for. But do notice that borrowing and lending always come with risk and we do not hand out financial advice on this website.
Crypto loan providers
Many of your cryptos can be used as collateral. This means that you can put up 100 dollars worth of BTC and then will be able to lend $80 dollars. Which you can then spend freely.
This ratio of how much you can borrow against your crypto varies a lot per crypto but also per crypto loan provider. Some might ask you to collateralize 200% and some might ask for 100%. However, once you receive the loan amount from the provider you are free to withdraw it and spend it freely on the thing that you took out the loan for. This you can do when you over-collateralize your loan with crypto. But this might not work for asset-specific purchases like houses.
But if you are looking to get a loan for free spending, starting a business, or anything else you might need it for. You can take a look at companies like NEXO, Coinloan, and Blockfi.
Can you use crypto for mortgages?
If you use the most popular way of crypto loans through NEXO etc. You will have to put more than 100% up as collateral, which might not be ideal for taking out a mortgage. But there are other platforms that are working on a way to finance mortgages backed by crypto.
One of the platforms working with this is the Defi platform Teller. They have already secured one of the first crypto mortgages and will try to do more of them in the future. And more platforms like Milo Mortgage have secured millions to bring their loan products to the market.
By using platforms like these you can buy a new house without having to sell your crypto. Although you will have to pay an interest rate on these loans. It does mean you won’t have to sell your crypto. This may benefit you if you believe in the long-term of crypto and that it might gain more than the interest you pay each year.
How do I verify my crypto assets?
When you have to put up your crypto as collateral. You will of course have to verify that you actually have the Crypto assets. You can do this in 2 ways, and will depend upon the platform which way you will have to comply. The first and most common would be to send the platform your crypto. This way they will custody of your Bitcoin/crypto and they will have full control over it, in case they might need to sell it to coffer your loan. This can happen in certain situations if you can not pay the loan back or if the value of your bought asset like a house or crypto also drops extremely.
Another less common way to verify that you have the crypto funds would be by signing it with your private key. This means that you would sign a message or transaction with your private key that holds the crypto funds. This way you can prove that you have the funds on a blockchain address that you control. You will however have to keep the coins on that blockchain address and not move it. As everyone can check the blockchain at all times and thus see if you decide to sell or move your coins. Not many loan providers will take you upon your word to not move it and thus will ask you to probably lock your coins in a smart contract that is written with release conditions or partly controlled by them. This way you and the loan provider can both utilize the trustlessness of the blockchain and be confident that no one will try to cheat the agreement.
Borrow against Bitcoin to buy more Bitcoin
One thing that some people do is borrow against bitcoin to buy more bitcoin. This is not a recommended thing to do as it increases your risk and makes your holdings leveraged. But in simple yes you could borrow dollars against your BTC to buy more BTC.
For example, if you would have to put up a collateral amount of 150%. You would be able to put up 150$ worth of BTC. Then borrow 100$ and use this 100$ to buy more BTC. You can then use this newly bought BTC to borrow even more. And this goes on and on. However, if the price of BTC goes down and one of the loans will have to sell the BTC to cover it. Then all of them will collapse and you will be left with almost nothing.
Although possible to buy more BTC with your BTC collateral the risk does get higher with each loan.
How to provide crypto or fiat for loans
One other way to profit from crypto loans is by sitting on the other side of the deal, and instead of putting up crypto or fiat as collateral. You could put it up to be lent out. This way you will bear much less risk and just like the loan platform make interest/dividend on your crypto. Or do this with a Defi protocol to make your crypto grow within your own wallet.
The interest for lending out both your crypto and your fiat currency holds quite high-interest rates. With platforms like NEXO and Coinloan that offer 10% (or more) on your fiat and 5%+ on crypto-assets like BTC and ETH. And even more on smaller cap assets. People on both sides of this market are needed to make it all work. But on both sides of it, there is money to be made and to be lost. So always be careful and read the details of these platforms so you know what you are getting into.
We hope this blog thought you a bit more about crypto loans and has answered your question “Can I use crypto as collateral?”. If you have any other questions for us feel free to reach out to us on our socials. This way we will know what questions you want us to answer next and to write about in our new blog. In the meantime feel free to browse through our blogs and reviews to learn more about crypto today.