Why Bitcoin is Used as Collateral For Loans
Bitcoin is used as loan collateral for various reasons which are advantageous to the users. Some of the reasons for initiating Bitcoin as a collateral for loan are: arbitrage plays, operation costs are covered without holdings being sold, making of the market, leveraging up (buying more crypto).
Crypto loan segments have grown large over the periods, aiding hodl investors to get cash without selling their crypto assets. The evolution of assets from physical to digital has enabled this innovation appealing, because of the unsophisticated process to get loans. Paperwork is eradicated and getting loan is now made fast and easy. The loan application is available to all who can satisfy the requirements of the loan. There is no involvement of the bank, and since it's digital, it is open to individuals around the world, making lending break the barriers of international borders.
Bitcoin has been at the forefront of the crypto world, thereby making it validated as a store of value. Apart from the crypto loan platform, some financial institutions now accept Bitcoin as collateral for personal loans to individuals. Bitcoin is being used as collateral for a loan, because of its present worth and its futuristic worth. Its valuation gave room for other promising cryptocurrencies, aiding their increase and improving the crypto market.
There are various reasons why many investors known as hodl investors would want to collect a loan using their major crypto-asset (Bitcoin) as collateral.
Bitcoin as Collateral for Loan
Some banks like the swiss banks have started to offer bank loans by making use of Bitcoin as collateral. Although this has not been accepted by the general financial institutions, lenders in this segment of loans are now making more feasible options. Competition emerging within these banks makes interest rates lower than normal and provides a vast option for loans, which innovates the lending world aiding businesses.
The negative reaction that Bitcoin had in time past has now been eradicated, as people have realized the advantage it has, and how it has become the virtual currency in the world. Bitcoin has now been seen by many as an asset like any other asset, because of its valuation.
Because of the risk attached to using bitcoin as collateral for loans, interest rates are quite high and the period for the loans collected using bitcoin as collateral are relatively short. Bitcoin has proven to be more acceptable as collateral than other crypto assets because of its value, and investors won't want to sell out their bitcoin even if there's a temporary need for cash.
Hodl investors are mostly the benefactors of these Bitcoin collateralized loans, as it aids them in their holding on to crypto-assets to gain an increase in the asset price. These investors have analyzed the benefit of collecting loans using bitcoin as collateral than actually selling it out for cash gain, the experience of not virtualizing the long-run gain of bitcoin has made the investors learn from past mistakes.
Reasons For Using Bitcoin as Collateral for Loans
Covering Operation Cost
Miners have the most to benefit from bitcoin being used as collateral for loans. Miners are professional investors and deal in a capital-intensive business. So there is a need to cover the cost of operations, which is then done through loans, to avoid selling Bitcoin that was freshly minted.
Deferment of Tax
Investors may want to avoid paying tax, which would have been triggered if the Bitcoin was sold out, instead borrows cash to defer tax and also satisfy his need for cash at that moment without selling his Bitcoin asset.
This is a widely used case for borrowing. The crypto market still has the futuristic advantage of profit increase, so traders then lock up their bitcoin as collateral to borrow cash. The arbitrage concept is a strategy whereby the trader spot price with shorts on future contract, and therefore hold on to the asset till expiration. Most investors take advantage of the arbitrage opportunity.
Most experts use this strategy to boost their exposure in the crypto market, where they lock their bitcoin as collateral to borrow cash, and then use it to get more Bitcoin or other cryptocurrencies. Although derivative exchange offers the same increase in exposure of cryptocurrency, leveraging in trading through loan collection gives a whole distinct process to liquidation. The collateral collection structure is quite distinct from that of the derivative exchanges. In leveraging, businesses don't have the aim of liquidating their borrowers' crypto, but in the derivative market, liquidation fees even exist, this gives the reason for the boost in popularity of leveraged lending.
Platforms That Accepts Bitcoin Collateralized Loans
Even though many financial institutions are not willing to accept bitcoin as collateral to give loans, because of its risk nature. Banks always seem to operate in a safe loan space to avoid losses that could have been prevented. While major institutions drive away from receiving Bitcoin as collateral, few companies have taken advantage of this innovation and solved a major problem for hodl investors. Here are some of the companies that Bitcoin collateralized loans.
This platform uses Bitcoin as collateral for loans and they give as high as $30,000 and low as $100 to any users who meets its requirement. Apart from bitcoin, the YouHolder also receives six crypto assets as collateral, which aids users in storing up crypto assets rather than liquidating. A huge problem has been solved by this, as it helps investors get cash without liquidating their Bitcoin. The loan period is short, last for about 120days
The gain in receiving bitcoin as collateral is huge, and Salt lending sees this potential profit and occupied the loan space, taking risks that companies aren't willing to take with a bitcoin collateralized loan. Although interest rates are higher than the traditional loan institute.
EthLend This platform also acts as other platforms do with a special approach called peer-to-peer, offering cash for Bitcoin without actually selling the bitcoin. And it acts more like a marketplace to both its borrowers and