Why borrow against crypto?
A crypto loan can make sense if someone holds a substantial amount of crypto and wishes to liquidate it without having to sell and possibly pay taxes on it, explains Gatzemeier.
These funds could then be used for a purchase or to invest in a business, much like borrowing from a bank. Personal loan.
Additionally, borrowers might see lower interest rates with a crypto secured loan. And unlike personal loans, there is no credit check.
The problem with crypto loans
From April 2021 to October 2021, the price of bitcoin fluctuated between around $ 30,000 and $ 64,000.
The volatile value of the crypto can lead to a margin call, where the borrower has to put in more crypto in order to maintain the value of the initial commitment.
If the value of your pledged crypto drops below a threshold set by the lender, you have a limited time to pledge additional crypto.
In cryptographic parlance, the ratio of the loan amount to the value of your collateral is called loan-to-value or LTV. For example, the maximum LTV of crypto lender BlockFi is 70%. At this threshold, borrowers have 72 hours to raise the crypto.
