Decentralized finance (DeFi) has changed the way people borrow and lend money, leading to the rise of the crypto loan. This new financial product lets people and businesses get cash without having to sell their valuable digital assets.
If you want to unlock the value of your cryptocurrency holdings without having to pay taxes or give up future gains, you need to know how to get a crypto loan.
This guide looks at the basic ideas behind cryptocurrency loans, how they work, and the many ways they can be used. Crypto loans are becoming an important part of managing digital assets today because they use clear, blockchain-based protocols.
Can You Get a Loan on Crypto?
Yes, you can definitely get a crypto loan, and this financial service is one of the fastest-growing areas in the digital asset space.
Investors can get a crypto loan and use their existing cryptocurrency holdings as collateral to get fiat currency (like USD or EUR) or other digital assets (like stablecoins). This gives the borrower a direct way to get cash without having to sell their assets.
Most of the time, these crypto loans are secured loans, which means that the borrower has to put some of their cryptocurrency (like Bitcoin or Ether) in a smart contract or a custodial platform.
The Loan-to-Value (LTV) ratio is an important safety net because the value of the collateral is always higher than the value of the loan amount. This secured structure is important because it lowers the lender’s risk.
Theoretically, it is possible to seek crypto loans without collateral in some DeFi models that use under-collateralized lending or flash loans. However, most borrowing platforms for consumers require collateral to protect against the volatility of the digital asset market.
How Do Crypto Loans Work?
Crypto loans work by using blockchain technology and smart contracts to automate the lending process, which means that banks and other traditional financial intermediaries are no longer needed.
This makes borrowing faster, clearer, and without needing permission. The mechanism depends entirely on the borrower’s collateral. When someone wants to get a crypto loan, they send their collateral (like Bitcoin) to a safe, decentralized lending protocol or a centralized lending platform.
The platform then gives the loan amount right away in a different asset, like a stablecoin (like USDC or USDT) or fiat currency.
The smart contract or platform takes care of the whole life cycle of the cryptocurrency loan. It keeps the collateral safe, automatically releases the loan money, and keeps an eye on the value of the collateral compared to the loan amount at all times.
If the price of the collateralized cryptocurrency drops too low and goes below a set LTV ratio, the smart contract automatically sells some of the collateral to pay back the loan and protect the lender. This automated liquidation process is very important for the safety and stability of all crypto loans.
Types of Crypto Loans
The market for crypto loans has grown quickly, and now there are many different types of lending models that meet the needs and risk levels of different borrowers. Anyone who wants to get a crypto loan in a smart way needs to know these types.
The type of lending is often based on whether it is centralized or decentralized and whether collateral is needed. There are mainly three types of cryptocurrency loan available today:
- CeFi, or Centralized Finance Loans in Crypto: Regulated, centralized companies, such as crypto exchanges or dedicated lending firms, give out these loans. The borrower gives the platform (custodial) their collateral, and the platform takes care of the loan and interest payments. These are usually easier for beginners and may pay out in real money.
- Decentralized Finance (DeFi) Crypto Loans: These loans are given out directly through open-source smart contracts on a blockchain (non-custodial). The borrower still owns the private keys to their collateral, which is locked directly in the smart contract. These loans are open and don’t need permission or credit checks.
- Flash Loans: These are a very specific and complicated type of DeFi lending in which a loan is taken out and paid back in the same blockchain transaction. These are crypto loans with no collateral, but only developers use them for arbitrage or complicated DeFi operations, not regular borrowers who need cash.
- Peer-to-Peer (P2P) Crypto Loans: These types of loans connect individual borrowers directly with individual lenders, usually through a platform. This lets borrowers get terms that are more tailored to their needs than standard protocol-based loans.
The type of crypto loan you choose will determine how much risk and custody are involved in the deal.
Why Take a Crypto Loan?
Investors choose to get a loan crypto for a number of good reasons, most of which have to do with capital efficiency, tax benefits, and flexibility that aren’t available with traditional financial products.
Being able to use digital assets you already own as leverage gives you unique strategic choices. The main reason to get a crypto loan is to get cash without having to sell the asset. If an investor thinks their cryptocurrency will go up a lot in value in the future, selling it to get cash means they have to pay capital gains tax and miss out on the market’s upside.
A cryptocurrency loan lets them keep the asset and the chance to make money in the future while getting the money they need right away. This financial move is very important for making the most of wealth management.
Also, crypto loans are quick and easy to get. There are no credit checks or long bank approvals needed. All you have to do is verify the collateral in a crypto loan smart contract to get instant cash. These are big advantages over traditional ways of borrowing because of how fast and easy they are.
What Can a Crypto Loan Be Used for?
A crypto loan provides the borrower a lot of financial freedom because they can use the money for almost anything. The money is completely fungible because the loan is backed by digital assets and not limited by the usual rules that banks have about how to use cash.
People often use the money they get from crypto loans for:
- You can use the money from the loan to make a down payment on a house, buy a car, or pay for other big things without having to sell your volatile crypto assets.
- Businesses often use their cryptocurrency treasury as collateral to get a crypto loan to pay for immediate operational costs, expansion costs, or to fill in cash flow gaps.
- You can use the loan money to pay taxes that would be due if the cryptocurrency were sold, thereby postponing the capital gains event until a later time when it is more financially advantageous.
- You can use crypto as collateral to borrow money, invest in traditional markets (such as stocks and bonds), or seek arbitrage opportunities in the digital asset space.
- You can use a service to turn the loan into cash right away so you can use it in your everyday life while keeping the crypto safe as collateral.
A cryptocurrency loan is a useful tool for both personal finance and managing a business’s treasury because it is flexible.
Pros and Cons of Crypto Loans
A crypto loan has a unique mix of financial benefits and risks that set it apart from regular loans. You need to think about the pros and cons of getting a crypto loan.
The pros are that it gives you quick access to cash and is tax-efficient, but the cons are that the market is very volatile. Many investors think that the pros of protecting their capital are more important than the cons, as long as they are smart about the risks.
Most crypto loans are structured in a way that makes them very useful for strategic investors. However, the fact that traditional banking models don’t have a legal safety net makes them more vulnerable in some ways.
The main benefits and drawbacks of getting a cryptocurrency loan are:
Benefits of Crypto Loans
- The borrower can get fiat or stablecoins without having to pay taxes or give up possible future gains from the underlying asset.
- Loans are often instant and don’t require credit checks or long applications, so you can get money right away.
- Interest rates on DeFi protocols, for example, can be much lower than those on unsecured personal loans.
- There are no limits on how you can use the money, whether it’s for a big purchase or an investment in a business.
Drawbacks of Crypto Loans
- If the price of the crypto falls below the liquidation threshold, the collateral will be sold automatically.
- While still having to pay back the loan, the borrower is still at risk of changes in the market price of the collateral.
- Decentralized loans can lose collateral if there are bugs or exploits in the code that powers them.
- Centralized platforms keep the collateral safe, which means that the platform could fail, be hacked, or be seized by the government.
In the end, whether a loan crypto is right for someone depends on how much risk they are willing to take and how good they are with money.
Is Crypto Loans Safe?
The safety of crypto loans is a relative idea that depends a lot on the type of loan (CeFi vs. DeFi), the quality of the lending platform, and the borrower’s plan for managing risk.
In a technical sense, a well-structured and over-collateralized crypto loan is meant to be safe for the lender because the collateral lowers the risk of default. This security is what makes it possible to get a crypto loan without the usual checks that come with fiat lending.
But for the borrower, the safety risk changes from default (like with regular loans) to liquidation and smart contract/custody risk. The fact that the liquidation process happens quickly and automatically is a big risk factor.
If the borrower doesn’t keep a close eye on the Loan-to-Value (LTV) ratio, market volatility could quickly cause them to lose their collateral. In addition to the safety of the collateral holder’s operational security and regulatory compliance, centralized crypto loans also have a risk that traditional banking does not have.
The fact that you can get crypto loans without putting up any collateral (like flash loans) makes the technical risk even higher, so only experienced traders should use them. In short, crypto loans are safe because they are often secured and automated.
However, the borrower is responsible for dealing with market volatility and technological risk. People should be very careful when dealing with them and be very aware of the risk of losing collateral, which is the cryptocurrency loan model’s biggest weakness.
What Are the Risks of Crypto Loans?
The risks that come with crypto loans are different from those that come with other types of loans. They mostly come from how unstable the market is, how decentralized technology works, and the fact that there is no traditional regulatory protection.
These risks are much worse than those that come with getting a regular bank loan, and you need to know about them all before you try to get a crypto loan. The worst part is that you could lose your collateral suddenly and permanently, which can happen automatically and without warning.
Also, the risks are even higher for people who are looking into things like crypto loans without collateral (flash loans) because the transactions are so complicated. The main risks of getting a loan with cryptocurrency are:
- If the market price of the collateral drops quickly (because of volatility), the automated liquidation mechanism will sell the collateral to pay off the crypto loan before the borrower can do anything, which means the asset will be lost forever.
- Code controls decentralized loan crypto protocols. If there are bugs, exploits, or bad code in the smart contract, the locked collateral could be stolen or frozen.
- The lending platform keeps the private keys to the collateral for centralized crypto loans. If the platform goes bankrupt, gets hacked, or gets in trouble with the law, the borrower’s assets could be at risk.
- Interest rates on crypto loans can change, especially in DeFi, and they may go up without warning, making the total amount due higher.
- The rules for crypto loans are still being worked out. New laws or crackdowns could make a lending platform illegal or make it hard to use, which could mean that assets are frozen.
Because of these risks, the borrower needs to be very knowledgeable about both technology and money.
How to Avoid the Risks of Crypto Loans?
To avoid the risks of crypto loans, you need to be proactive about managing risks, always be on the lookout, and know the platform or protocol you’re using very well. The main goal is to keep the collateral from being sold, which means managing the LTV ratio smartly.
Successfully reducing risk means that the investor can take advantage of the benefits of the cryptocurrency loan without losing everything.
Borrowers should keep their LTV ratio low by choosing a loan with an initial LTV ratio that is much lower than the maximum allowed (for example, borrowing at 20% LTV instead of 50%). This will help reduce the risks of a cryptocurrency loan. This makes it hard for prices to drop.
Borrowers should keep an eye on the collateral by setting up alerts and notifications to keep track of its price around the clock. If the LTV ratio gets close to the liquidation threshold, be ready to add more collateral (top-up) right away. This is very important for keeping the loan crypto position safe.
Choose platforms that you can trust. For CeFi crypto loans, use platforms that are well-known, regulated, and have clear audit reports and strong security measures. Stay with audited, well-capitalized protocols that have been around for a long time when it comes to DeFi.
To understand the fine print, you need to know the exact interest rate structure, the exact liquidation threshold, and how to get your collateral back on the platform or smart contract.
You should keep the money safe. After you get a crypto loan in stablecoins or fiat, move the money to a safe place off the platform, like a private wallet or a digital payment platform you trust. Jeton can help you as we support 50+ payment methods across Europe.
How Do You Get a Crypto Loan?
Getting a crypto loan is a simple process that usually only takes a few steps. This shows how much faster loan crypto services are than regular banks.
The basic mechanics are the same whether you choose a centralized (CeFi) platform or a decentralized (DeFi) protocol. They both involve over-collateralizing the loan. This is a step-by-step guide on how to borrow money in cryptocurrency.
First, pick a Platform/Protocol by choosing a lending service, such as an exchange, a dedicated CeFi lender, or a DeFi protocol like Aave or Compound, based on the best interest rates, LTV ratios, and reputation for security. Make sure that the platform you want to use supports the collateral you want to use.
Second, deposit collateral by linking your digital wallet and sending the right amount of cryptocurrency (like Bitcoin or Ethereum) to the platform. To meet the over-collateralization requirement, this amount must be greater than the loan value you want.
Third, set up the Loan Terms by choosing the amount you want to borrow (which sets the initial LTV), the type of asset you want to borrow (like a stablecoin or fiat), and the repayment schedule or term length. You won’t have to go through a credit check, which makes it easier than most other types of loans.
Fourth, get the loan. As soon as the collateral is in place, the loan amount is sent to your linked digital wallet right away. If you borrowed stablecoins, you can use a special financial service to turn them into real money.
Fifth, keep an eye on the collateral’s value and the LTV ratio to manage and pay back. You must pay back the crypto loan according to the terms you agreed to. Once you do, the collateral will be sent back to your wallet.
Services that connect the crypto and fiat worlds are very helpful for getting to fiat money easily after getting a stablecoin cryptocurrency loan. Jeton lets you directly manage and spend digital currencies.
Jeton offers the ultimate financial home for your assets. We’ve moved beyond fragmented banking to provide a single account for all your payments, designed to help you unify your finances in one secure place.
With Jeton Wallet, you can add, send, or exchange all currencies in one app, making it the perfect destination for your loan proceeds. With Jeton Card you can spend your liquidity instantly with contactless payments at millions of locations worldwide.
Trusted by over 1 million happy users, Jeton connects you to 50+ payment methods across more than 25 countries, ensuring that your global transfers are always fast and safe. Download the Jeton App via the App Store or Google Play and sign up for one app for all needs today!
