Crypto Loans Unlock Money, But They Come With Risks | Personal finance



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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.

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