What is Collateral Crypto?

In crypto-backed lending, the term “collateral” refers to the digital asset that the borrower is pledging as reassurance they will repay the loan. In more traditional finance, collateral typically comes in the form of a mortgage for a home (the asset) or something of that nature.

So what does crypto collateral have to do with crypto loans, and why are they important? Let’s discuss.

Crypto Collateral: The Basics

If you want to borrow cryptocurrency, AKA taking out a loan, you’ll need to choose the right platform. Crypto lending occurs via a lending platform to connect lenders and borrowers.

Crypto loans are relatively easy to take out. You’ll receive your loan amount depending on how much collateral you are willing to put down. Loan-to-value ratio translates to the amount of the loan itself and the collateral’s value.

So, for example, if you put about $10K in crypto collateral, and the loan you received was $5K, the loan-to-value ratio would be 50%. Due to the market's high volatility, most crypto loans come with low LTV ratios.

Summary of Important Points

  • Choosing a trusted and legitimate lending platform is important
  • Collateral is pledged to ensure the loan will be repaid
  • Loan amounts vary depending on the amount of collateral pledged
  • Loan-to-value ratio (LTV) = loan value and collateral value
  • Collateral is returned once the loan is repaid

If you’re lending your crypto, you will need to find a trusted platform and consider whether you prefer fixed or flexible. Afterward, you’ll need to decide which coins you’ll lend out. Choosing will depend on the current market conditions, the returns you seek, and how much you are willing to place yourself at risk.

How Does Collateral Crypto Work?

Crypto lending happens in just a few steps:

  1. The borrower finds a lending platform and requests a crypto loan
  2. Borrower stakes crypto collateral as soon as the chosen platform accepts the loan request
  3. When using a platform, lenders will automatically fund the loan, which is a process investors can’t see
  4. Investors receive interest as payments
  5. The borrower completes the repayment of the loan and gets the crypto collateral back

Each platform has slight differences in how it operates, but the process is typically similar across all of them. So how does a borrower land a crypto loan without collateral? Let’s discuss.

Getting a Crypto Loan Without Collateral

Collateral is used to protect the lenders, so anyone advertising “collateral-free crypto loans” is likely a scam artist. Crypto loans are no exception—borrowers should beware.

If you are going to pursue a crypto loan without collateral, do not be surprised if you can’t get a large amount, if any. If a lending platform is trusted and reliable and allows you to receive a loan with no collateral, it will be for a minimal amount.

Can Crypto Be Used as Collateral?

Can crypto be used as collateral for more traditional loans from large financial institutions? The answer is no. Although, plenty of online lending platforms are dedicated to pairing up lenders and borrowers and facilitating the entire process.

Using a digital asset such as Ether is a great choice when using crypto as collateral. You can use it virtually anywhere, including most major DeFi lending platforms like Compound Finance, Dharma, dYdX, MakerDAO, Nuo Network, plus many more. Remember that you will get your collateral back once the loan is repaid, so you won't lose that investment.

Why Crypto Loans Without Collateral Matter

There’s a need for reliable lending platforms that cater to borrowers who don’t have collateral or can only put down a small amount. Since the market is rapidly growing and evolving constantly, there’s no reason we shouldn’t expect to start seeing this in the future. However, only time will tell whether major lending platforms are willing to pursue that risk.