To start successful cryptocurrency trading and make your portfolio profitable, you need to know all the nuances of the digital asset market. How is it built? How does it function? And what key parameters can impact it? Let’s dive deep in the topic of crypto lending so that you could get the maximum out of your operations.
This review will focus on the basic crypto lending risks that a beginner crypto trader should avoid in order to multiply one’s capital with a bitcoin loan easily. Instead of taking blind steps, plan your trading actions smartly.
What Are Crypto Loans?
Crypto lending is an alternative decentralized way of borrowing money (tokens). Its essence is associated with the fact that the tools are offered and used by the users of the network. That is, the participants of the lending platform can borrow money or even provide loans themselves within the network without an intermediary party – a bank.
Cryptocurrency platforms act as sites where borrowers and lenders interact directly. As a rule, both parties are ordinary people; some just need quick and cheap borrowed money, while others have free capital for investment. The implementation of this principle of lending is presented on different payment service platforms, where users can exchange fiat money among themselves just in a few clicks. Since 2013, such loans have appeared on cryptocurrency P2P platforms: now, you can borrow cryptocurrency with no limits or restrictions.
Dividing the Crypto Lending Market
The entire market is usually divided into several popular areas for working with finance:
- Loans and deposits – One owner of cryptocurrency can lend it to another user for a specified period at interest on the security of a digital asset;
- Decentralized exchanges – Instead of sending funds to an exchange wallet, DEX creates an environment for the direct exchange of tokens between users;
- Investment – High transparency makes investing less risky and allows you to make money on the assets that you hold for a long time, which is also called “yield farming.”
Crypto Lending Risks
As in any other financial area, crypto lending has its own risks. Here are the main ones:
- Error or hacking of the platform’s smart contract with partial theft of funds from pools. Some platforms have made up for the losses and some have not;
- Commissions when interacting with contracts – For each movement/transaction, you will pay a commission. Therefore, before you start, consider whether you can recoup the cost of charges;
- There are no regulations – This is both a benefit ensuring anonymity and decentralization; however, it is also a drawback. Thus, in case of failures in a smart contract, no one will insure you, except for the founders of the platform.
It is worth adding that crypto lending must be approached responsibly and deliberately. Keep in mind that cryptocurrency has high volatility, so it is worth looking for crypto loans with a fixed interest rate and pegged to the current exchange rate during loan processing. Only in this way, the borrowed money is beneficial and will not make you stress out. Plan all your financial payments and receipts in advance and do not take your first loan in Bitcoins in a too large amount.