As the polarizing cryptocurrency market evolves, many investors have begun to shift their focus from diversifying into various digital assets and projects to maximizing profits on existing holdings. One of the most exciting investment opportunities that have recently captured the attention of crypto enthusiasts is borrowing bitcoin against their current holdings this way they get more leverage and can use the extra bitcoin. In previous years, traditional financial institutions have been reluctant to offer this kind of service for fear that those looking to short the market could be abused.
However, as more and more people recognize the financial benefits of leveraging their assets, innovative companies have begun providing bitcoin-specific loan services that allow investors the ability to borrow bitcoin against their existing crypto holdings. In addition, these companies offer several different programs that provide a variety of incentives and interest rates.
What is bitcoin borrowing?
The concept of lending in the cryptocurrency space is not new, and platforms such as SALT have been offering this type of service to holders since 2017. However, for much of 2018, massive bearish trends across the board have made it difficult for lenders to offer their services without taking significant risks.
One of the main problems with lending cryptocurrency is there is no guarantee the asset will rebound in value after a short period like traditional financial instruments such as stocks and bonds. As a result, many investors who hold large amounts of bitcoin or altcoins may be looking for ways to generate extra income on their existing holding. Many companies have begun to address this problem by offering more innovative loan products and incentives for borrowers, including various types of insurance and additional fees to compensate lenders if bitcoin fails to rebound as expected.
How does bitcoin borrowing work?
One of the most significant problems faced by any company looking to provide bitcoin borrowing services is the sheer volatility of the market. In general, lenders are looking for any type of guarantee they can take from borrowers before extending a line of credit. In most cases, this involves an extensive vetting process that seeks to understand a borrower’s current cryptocurrency portfolio and history with digital trading assets. This information is then used to provide a credit score that can be used to determine how much money an investor is allowed to borrow. After the terms have been agreed upon, lenders are sent a list of wallet addresses belonging to the borrower’s cryptocurrency portfolio. After receiving this information, lenders will send the initial loan amount required for the duration of the agreement minus fees and interest directly to one or more of these wallets.
In addition, many companies have begun to offer more creative loan types that reward borrowers for their loyalty or incentivize them to transact more business through a specific service. For example, some lending services allow borrowers to borrow bitcoin against other cryptocurrencies such as ethereum and litecoin. In exchange for using these alternative cryptocurrencies for collateral, borrowers are often required to transact a certain amount of business through the service.
What are the benefits of bitcoin borrowing?
There are many reasons why bitcoin borrowing services have become increasingly popular throughout 2018. One of the most significant advantages of borrowing bitcoin is that there is no need to pay capital gains taxes for any returns generated during the life of the agreement. For example, if an investor agrees to a one-year loan that generates three percent interest per month but then pays it off after just 30 days, they are not required to pay any additional taxes on the income earned from interest or dividends. This is because digital assets are taxed when they are sold, not lent or borrowed. Another essential benefit of borrowing bitcoin is there is no need to sell any existing holdings to generate extra income. All that is required is simply selling future access to bitcoin for a certain period.
However, this advantage does come with its own risks as well. For example, there are no guarantees that any return generated during the agreement will be sufficient to offset potential losses when lending the asset. Some companies have also begun offering insurance to offer more protections for both lenders and borrowers, though this is still a relatively uncommon practice. Another essential consideration for cryptocurrency holders looking to borrow money against their digital assets is the impact on their credit score. In many cases, borrowers will have to commit a certain amount of collateral to secure a loan, which may immediately impact their ability to take out additional loans in the future.
What are some of the risks associated with bitcoin borrowing?
Bitcoin borrowing carries the same risks associated with traditional cryptocurrency trading. Without proper diversification, investors could potentially lose money by holding too many of their assets in a single currency or type of asset. For example, if an investor agrees to a loan but then loses money on the bitcoin they borrowed due to market fluctuations throughout the agreement, they may be required to pay additional fees or interest charges to the lender. Another critical risk for cryptocurrency holders is there are no limits on how much a lender can ask for in return for a loan. This means that if an investor is not careful, they could find themselves locked out of the cryptocurrency market for an extended period.
Some services allow borrowers to keep 50% of their remaining holdings after an issued loan, while others require as much as 80%
What are the most popular bitcoin borrowing services?
You can now borrow cash against your crypto-holdings, using the BlockFi interest-bearing line of credit. BlockFi allows you to hold onto your crypto-assets and still get cash when you need it. If you want to get a loan to buy real estate or finance a business project, but would prefer not to liquidate your Bitcoin (BTC), you can now do both at the same time, by using BlockFi. BlockFi’s service is made possible due to its ability to source capital from institutional investors who want exposure to Bitcoin (BTC).
LTV Interest Rate Origination Fee
50% 9.75% 2%
35% 7.9% 2%
20% 4.5% 2%
Binance has recently begun offering cryptocurrency borrowers access to loans denominated in USD, GBP, and EUR depending on their need and ability to provide collateral. The platform’s loan service is still in beta testing but will soon be available to all interested parties. Binance has also recently partnered with SALT Lending, a powerful cryptocurrency lending platform that offers USD loans backed by digital assets. At present, loans are only provided to investors in certain US states, though this could expand as more agreements are reached between the two companies.
Daily/Yearly Interest Borrow Limit
0.020000% / 7.30% 60
Another lending platform where you can borrow against your bitcoin is Nexo, which offers loans denominated in USD and backed by Ripple (XRP), Ethereum (ETH), and Bitcoin (BTC). Loans are available instantly once approved, and the borrower only needs to provide an email address for verification purposes.
The Gold or Platinum clients can get premium rates of 0% – 1.9%, while keeping the LTV below 20%
Gold Clients: At least 5% of the Portfolio Balance in your account must comprise NEXO Tokens; interest on your outstanding credit line balance is 8.9% if your LTV is above 20% and 1.9% if your LTV is below or equal to 20%.
Platinum: At least 10% of the Portfolio Balance in your account must comprise NEXO Tokens; interest on your outstanding credit line balance is 6.9% if your LTV is above 20% and 0% if your LTV is below or equal to 20%.
Coinbase has also emerged as a popular option for cryptocurrency holders looking for cash in exchange for their digital assets. Loans are available in USD and EUR depending on the size of the loan you need, while loans can be paid back over periods ranging from 1 to 36 months.
Suppose an investor wants to borrow bitcoin against other major cryptocurrencies. In that case, they can turn to exchanges like Exmo, where both lenders and borrowers are easily matched up using the platform’s advanced search tool. Unfortunately, Exmo does not support fiat currency loans. However, investors can still borrow and lend bitcoin regardless of whether they want to keep the majority of their assets in BTC or diversify into other cryptocurrencies.
You can borrow as much as 40% of the value of the Bitcoin in your account, up to $1,000,000.
There are no fees or credit checks involved, just a low APR of 8%.
Another major exchange that offers cryptocurrency borrowing is OKEx, allowing holders to take out loans denominated in USDT, BTC, or ETH. Loans are available for both short-term and long-term periods, with interest rates ranging from 0 to 10%.
LTV Interest Rate
Bitcoin Borrow money at rates are as low as 4.5% APR
Strategy on bitcoin borrowing
The first and most common for new investors is simply buying coins through exchanges like Coinbase, Binance, Kraken, Gemini, etc. Many exchanges will allow you to link up your bank account or credit card so that when you deposit money, it is automatically converted to BitCoin. This can be helpful since many exchanges charge fees for this service, which vary depending on the amount of money you are depositing. The other option is finding someone who has bitcoins they want to sell and agreeing on a price with them. There are websites like LocalBitcoins where you can find people in your area willing to sell bitcoins for cash or other forms of payment. The last option is borrowing them from an individual or organization that already has them, typically called a crypto-lending platform.
Steps to borrowing bitcoin
Step one – Once you have your wallet all set up, you will need to find a site that offers this type of loan. One popular site is BTCJam.
Step two – You will be guided step by step in creating an account on the service, including how much money in US Dollars or Bitcoins you would like to borrow. You will be asked to create a password and enter some personal information.
Step three – Once your loan request starts, the site will ask you for more information about yourself. Again, this helps them determine your creditworthiness. For instance, if you are employed, they may not need to ask any additional questions.
Step four – At this point, you may be approved right away by the service. Or they may need more information from you to complete your loan application. This can take anywhere between a few hours and days or weeks if the site believes you are not creditworthy.
Step five – Once you have been approved for a loan, you will receive the funds in your wallet. This process is usually swift, sometimes even instant, once approved.
Step six – You must understand that this is a short-term loan on bitcoins, unlike a credit card or bank loan. The maximum term allowed by most of these services is 2 years long.
Bitcoin Borrowing Frequently Asked Questions
1. What does it mean to borrow Bitcoin?
Borrowing is taking out money against something that has value. For example, in Bitcoin, your cryptocurrency would act as collateral for you to receive fiat cash; however, if you fail to repay your debt or make late payments, then the lender may take possession of your bitcoin.
2. Who would borrow bitcoin?
Borrowing is used when there is a financial need, and the borrower has exhausted the use of their own cash or credit options to meet that need. We all have had to borrow money at some point in our life, such as borrowing for school, to finance an investment opportunity, etc. In the case of bitcoin, those interested in acquiring more bitcoin could borrow from a lender to increase their digital currency holdings.
3. Is it possible to borrow against my bitcoins?
The answer is yes, but only a few platforms offer this service at present. Platforms that facilitate the borrowing or lending of bitcoin are called bitcoin lenders. They act like banks; however, they don’t fall under the same regulatory laws that traditional financial institutions do.
4. What is the interest rate for borrowing bitcoin?
Different platforms will offer different levels on their interest rates; some may offer as low as 1% per month, and on the other end of the spectrum, 45% monthly. Therefore, it’s essential to do your research before borrowing from any platform.
Despite the risks, several advantages are associated with borrowing bitcoin. Perhaps most notably, there is no need to pay capital gains taxes on any returns generated during the life of the agreement. Additionally, lenders do not have to worry about losing their principal investment if prices drop precipitously. Of course, there are no guarantees any return generated during the agreement will be sufficient to offset potential losses in a bear market – but that’s why it’s essential for borrowers to carefully consider all of their options before entering into an agreement.