All You Need To Know About Bitcoin-backed Loans

What are Bitcoin-backed Loans?

Bitcoin-backed loans are crypto holdings that are in the form of collateral accounts. In this manner, the borrowers are able to access cash while remaining in control of their Bitcoin reserves. Bitcoin-backed loans are a type of innovation in the traditional loaning sector.

It has merged the product with cryptocurrencies. These loans allow Bitcoin investors to use their holdings to acquire loans without selling them. It is a unique method to access liquidity. This type of loaning method has made debt acquisition more accessible.

What is Crypto Lending?

Crypto lending is a branch of digital asset sector that has expanded the solution for individuals and businesses to acquire debt. There are various advantages associated with crypto lending such as lesser documentation and hassle-free instant loan rewards. In this manner, users can borrow easily and invest in crypto trading ventures.

Lenders are able to deposit their holdings on different debt platforms in order to earn high interest and surpass traditional savings on account of market volatility. At the same time, borrowers may gain access to capital as a way to liquidate their crypto holdings.

It is possible with the help of creation of collaterals that are based on top of cryptocurrencies. The formation of a crypto collateral account is very easy for borrowers to acquire loans in the form of stablecoins or fiat. They can unlock liquidity with holding the crypto reserves in locked collateral accounts.

Crypto Lending in DeFi

In decentralized finance (DeFi), a number of semi-autonomous protocols make use of smart contracts to lend cryptocurrencies. In this manner, it is possible to eliminate the need for intermediaries and enhance transparency and ensure security for borrowers.

These unique features highlight the potential of DeFi sector to transform financial industry building on top of platforms such as AAVE, Compound, and MakerDAO.

DeFi sector has also enabled Bitcoin lending in the form of Wrapped Bitcoins (WBTC). WBTCs work with smart contract networks such as Ethereum, Arbitrum, Polygon, and Solana.

In this manner, the investors are able to take part in decentralized lending without any restrictions or obstacles and contribute to considerable liquidity.

Classification of Crypto Loans

There are two major types of cryptocurrency loans mentioned as under:

Collateralized Loans:

Cryptocurrency investors can use collateral loans for two primary options. The first one is centralized finance (CeFi) that requires borrowing money from crypto or blockchain firms. These firms function similarly to TradeFi institutions that are operated by private firms. These products are more secure on account of their regulated nature and protected against risks such as security threats and downturns.

Uncollateralized Crypto Loans:

DeFi loans are a way for borrowers to take up crypto loans from decentralized blockchains. These platforms are usually designed as open-sourced networks rather than working like a bank or government. DeFi products allow borrowers to access digital reserves input by clients in a direct way. Furthermore, the lenders are also at liberty to secure debt if and when required.

How to Get a Bitcoin-backed Loan?

Here is a step-by-step guide to acquire a Bitcoin-backed loan:

• Borrower appeal to the lending parties to get a loan.
• Borrowers send Bitcoins into a lending platform using a crypto wallet.
• Lending parties decide the LTV ratio. It is the interest rate to be applied on the acquired loan.
•  Loan disbursement starts to take place after the loan has been approved.

Impact on Collateral in Case of Borrower Default

It is important to note that Bitcoins added to a collateral account are not fully owned by either borrower or lenders. This collateral is used as a warranty that the borrowed funds will be returned before the due date and with the specified accrued interest. At the same time, borrowers are under obligation to maintain the collateral value to a specified state.

If the collateral value slips below the minimum value, it can trigger a margin call that prompts the borrowers to maintain an acceptable amount. In case the borrower is unable to maintain the collateral value or pay outstanding balance or interest amount the entire Bitcoin reserves placed in the collateral can be liquidated.

Conclusion

Bitcoin-backed loans carry a lot of advantages such as accessing quick cash, maintaining Bitcoin ownership, and benefit from future price appreciation. At the same time, it poses some risks such as margin calls and sizeable interest payments.