Contrary to what some would have you believe the crypto lending industry is alive and well. There is still significant demand for loans from the holders of crypto and there are companies prepared to meet that demand in a responsible manner. However, you might not believe that to be true if you base your opinion on headlines in traditional financial news outlets.
Why Should Crypto be Different?
The collapse of Celsius in 2022 led to many people outside of crypto implying that that debacle was the result of the industry that the company was in, not the way they operated within it. That is like saying that Salomon Brothers collapsed because they are a bank, or that Enron did so because they were an energy company. In all three cases, a company in a particular industry took massive risks in search of big returns and came unstuck. The demise of Salomon and Enron says a lot about the nature of risk and the quality of management in the organizations, but nothing about the industry they were in. Why should crypto be any different?
Obviously, it shouldn’t, but that is no impediment to the ignorant and those desperately searching for clicks, ears, and eyeballs. Implying that the whole crypto lending industry is collapsing is lazy and uninformed for sure, but it does make for some sensational headlines.
Crypto Loans with Collateral
The fact is that for the companies and platforms involved, crypto lending is just like any other industry when it comes to risk; it is always present, but to what degree it is a factor depends on how you operate. If a company offers unsecured loans against cryptocurrency, they are creating a potential problem for themselves just as they would be if they offered you a mortgage without requiring a lien on your property. On the other hand, if a reasonable level of collateral is required, crypto loans, like any other loans, can be mutually beneficial, relatively low risk transactions.
Why People Take Out Crypto Loans
So, if collateral is required to ensure a stable, sustainable industry, why take out a crypto loan? Why effectively give up control of your crypto by staking it in order to take out a fiat loan? Why not just sell some Bitcoin or Ethereum when you need some cash?
The details of the answer are different for everyone that does it, but the fundamental reason most people take out loans against crypto is because they understand the difference between a long-term value proposition and a short-term opportunity. Hodlers of Bitcoin, ETH, or other coins, are in it for the long run. They don’t want to be forced out of their positions by headlines or market volatility, but they do want to maybe add to their positions while the market is depressed, expand their businesses without selling their prized assets, or pay for a large purchase. Loans are the answer for them.
Future of the Crypto Loan Industry
As long as that differential exists between the long-term potential of crypto and short-term opportunities that require cash there will be demand for crypto loans, and as long as there is demand for loans, there will be companies who will service them. There will no doubt be some in the future that overextend themselves and get into trouble, just as there will always be banks that do the same. However, the majority of crypto lenders, who require reasonable collateral and conduct their business with an eye on risk, will survive. Indeed, as the worlds of conventional finance and crypto and blockchain technology become increasingly intertwined, they will thrive.
Use The Calculator
Check out the Loan Calculator to see how much you can borrow against your Bitcoin, Ethereum or stablecoin balance.
Author: Martin Tillier
Martin has around forty years of market experience and, in addition to his role as Head of Research at SmartFi, is a daily contributor of market analysis and opinion to Nasdaq.com. He first became interested in crypto 2014, when he started writing regularly on the subject. He is from England but now lives in Connecticut, USA with his wife, his dogs, and his three kids’ college tuition bills.
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