Despite Celsius liquidating its Bitcoin loan due to extreme market conditions and huge market sell-off, the crypto loan industry continues to boom. Crypto loans or crypto lending is a major cornerstone of the crypto industry and has continued to be one of the main drivers of crypto adoption. As with traditional lending, crypto lending allows savers to earn interest on their deposits. On the other hand, crypto loans offer borrowers the chance to access funds without giving up their assets. Are these the major reasons for the industry’s boom over the last few years? Well, there are others, that we would look into in this post. Don’t forget to check out our CoinRabbit review here for crypto loan options.
The crypto loan industry may not stand toe to toe with the traditional lending space, but we can’t overlook how fast it has grown over the years. Despite the colossal market sell-off, borrowers continue to leverage crypto lending platforms. What’s the catch?
In Latin America, inflation and economic instability are a new reality, making it challenging for Latin Americans to access credit. In Mexico, the interest rate is at an all-time high of 8.5 percent, while Brazil has the second-highest interest rate globally, with 13.75 percent, behind Argentina’s 75 percent. These rates make it impossible for Latin Americans to repay their loans amid the rising inflation. Crypto loans now serve as an alternative to traditional banking in the region as they offer lower interest rates.
Ledn, a Canadian lending platform that started operation in Latin America in 2019, is responsible for 50% of the loans granted to Latin Americans. The company offers credit in USD and USDC stablecoin at an annual rate of 7.9%, which is better than what traditional banks present in the region. Besides Ledn, Buenbit, a crypto exchange in Latin America, also gives out crypto credits in Argentina. Since the launch of the lending feature, borrowing on the platform has grown by 70%, with over 25 loans closed every day. The hike in interest rates is an obvious trigger to the growth of crypto lending platforms and crypto adoption.
Unlike traditional banks, access to crypto loans typically demands only collateral. There are no credit checks and paperwork, which further complicates the loan process. Crypto lending is the ultimate vision of DeFi where processes are bypassed to reduce the barrier to financial services and products. As a result, digital assets lending sites are more straightforward to access than banks. The desire to borrow crypto instantly without paperwork is one reason for the lending market’s boom.
Another reason for the boom of crypto lending is the interest rates being offered. Savings at traditional banks attract low-interest rates, usually less than 5%. Meanwhile, crypto lending platforms offer as much as 20%. For retail investors, crypto loans offer an attractive return, and you can withdraw your funds at any time. How do crypto lenders make money? They do so by charging interest on loans and deposits.
Furthermore, the crypto lending market is globally inclusive. Our so-called today’s global financial market restricts liquidity flow. You can’t take a bank loan in another country or transfer money to another country instantly. In the crypto space, liquidity flows instantly. You can transfer money immediately without a gatekeeper or through multiple banks, which costs time and money. Crypto lending is borderless and doesn’t care if you live in the United States or Europe.
Finally, crypto lenders aren’t regulated, unlike traditional banks. While this benefits the borrowers and lenders in terms of access to capital and less paperwork hassle, transparency is not guaranteed. Plus, customers could lose their funds when market conditions are unfavorable. Because of low oversight, crypto lenders are at risk of tech failures and vulnerability.
Because of Celsius, crypto lenders are now under the microscope of the SEC and other state regulators. The SEC is also designating some interest-bearing products as unregistered securities. This led to the payment of $100 million by BlockFi as a settlement over its yield product in February. SEC also issued a similar warning to Celsius, labeling its Earn product unregistered security.
Still have some unanswered questions about crypto lending? Read further on our everything you need to know about crypto loans.
The crypto loan industry will fundamentally change how we save money and access credit. Its growth indicates how disruptive crypto lending will be in the next few years. It presents an alternative to companies and investors who have been denied loans from traditional banks to access credit without paperwork. With the establishment of a regulatory framework, risks will be mitigated, and companies outside the crypto industry can raise capital conveniently.
As for retail investors, crypto lending can give you an earning opportunity that is almost non-existent in the money market. It is a wonderful alternative to capital-intensive investments like real estate. In the long run, crypto loans will replace traditional banks and limit their market power, leading to a democratized financial market.
- Which crypto lending platform is best?
Some of the best crypto lending platforms currently are YouHodler, Nexo, BlockFi, CoinLoan, and Gemini Earn.
- Is lending crypto profitable?
Lending crypto is profitable if you sign up on the right platform. It is 10x more profitable than a traditional savings account. However, lending is risky.