Weighing Up the Pros and Cons of Borrowing Cryptocurrency

A crypto loan comes with a low-interest rate, no credit checks, fast funding, and the loan amount is based on your collateral. Learn more here.

Josiah Makori
By Josiah Makori
Marcel Deer
Edited by Marcel Deer

Published June 26, 2022.

Why should someone who owns some cryptocurrencies want to take a loan on their crypto assets? Why can’t they sell some of their holdings instead of using them as collateral? Well, here are five reasons for borrowing crypto:

  • Save money: When you opt to take a loan against your crypto assets instead of selling them, you avoid tax liabilities and service fees inquired during selling and withdrawing.
  • Hold Onto Dear Life (HODL) – Borrowing enables you to meet your immediate financial needs without selling assets you intend to hold for a long time.
  • Earning while holding – As you hold your crypto assets in a DeFi protocol, you can use your loan to diversify your investment portfolio and mitigate investment risks.
  • Turning the loan upside down: Lending protocols like CoinLoan allow you to earn interest on your digital assets through the CoinLoan Interest Account.
  • Avoiding borrower’s risk: Crypto loans minimize unnecessary delays and eradicate the need for credit checks and related paperwork. You simply deposit your crypto assets as collateral.

Can You Borrow Crypto Against Your Own Crypto?

You can borrow crypto against your own crypto. In fact, this is the basic principle of cryptocurrency lending and borrowing.

Crypto loans have a straightforward process compared to traditional loans. You qualify for a loan based on your crypto collateral. The Loan-to-Value (LTV) ratio is the amount of your loan in relation to the value of your collateral.

For example, if you want to deposit crypto-worthy $50,000 in a DeFi protocol as collateral to qualify for a loan of $25,000, the LTV ratio is 50%. As you can see, cryptocurrency loans have low LTV ratios because of the crypto markets’ volatile nature. However, each DeFi protocol has different criteria for borrowing and lending. For instance, what you need to borrow crypto with Compound, will vary compared to Binance, Kucoin, or other popular exchanges.

What Are the Risks of Borrowing Crypto?

Here are the main risks of borrowing crypto:

  • Custody and security risks – Since DeFi lending platforms are not regulated like traditional banks, you must fully trust them when depositing your assets in their protocols. In this regard, you risk losing your assets through rug pulls and hacks.
  • Risk of platform insolvency: The deposits (including collateral) are not insured in crypto lending and borrowing. Therefore, you might lose your locked assets if the platform becomes insolvent.
  • Volatility of crypto assets: If the value of the asset you borrowed gains and exceeds your collateral, you risk being liquidated.

But this does not mean you shouldn't borrow crypto. Since the pros outweigh the cons, you can borrow crypto - especially if you are a long-term holder.