When borrowers apply for a loan with their bank, they must prove their creditworthiness by providing at least a credit history.
On crypto loan platforms, borrowers only need to deposit cryptocurrencies as collateral to get a loan. This makes it an attractive option for borrowers with crypto assets looking for quick funds.
If you’re looking to crypto lending platforms as a source of funds through obtaining a crypto loan, here’s a practical guide on how to borrow crypto
What Is Crypto Borrowing?
Crypto borrowing is the opposite of crypto lending. It allows borrowers to stake their crypto assets as collateral or insurance in exchange for fiat currencies or stablecoin loans.
If you are not sure what crypto lending is, view our crypto lending article. If you already have some coins and want to make money off of them, you can lend them through the same platforms that crypto borrowers use to get coins.
When you place your coins to lend, and a borrower stakes collateral to borrow, your coins are automatically given to the borrower. There are risks and rewards; check that article for that.
Must I Have a Collateral to Borrow Crypto?
No. Typically, crypto borrowing comes with the collateral stipulation, but interest and collateral-free platforms exist. Resource Network is one of them; it allows registered businesses and self-employed persons to obtain uncollateralized and interest-free crypto credit to grow their business and motivate employees. The credit can be paid back by offering services on the platform.
How Cryptocurrency-Backed Borrowing Works
Similar to traditional security-based lending — where a borrower deposits security (e.g., stocks) as collateral in return for a loan — on crypto lending platforms, borrowers deposit crypto assets (e.g., Bitcoin, Ethereum, etc.) and get a loan (e.g., US dollars, Euro, Teter, USDT, etc.) in return.
For the loan period, borrowers cannot access their collateralized cryptos. Once the debt is fully repaid, the borrower earns back his collateral.
The process to borrow crypto-backed loans differs from one crypto lending platform to another. However, the overall process unfolds like this:
- The borrower visits a crypto lending platform and requests a crypto loan.
- The borrower stakes the crypto collateral as soon as the platform accepts the loan request. Until they fund back the entire loan, the borrower will not have the opportunity to get back the stake crypto.
- Using the platform, investors/crypto lenders will automatically fund the loan.
- Investors will receive regular interests as payments.
- When the borrower pays off the whole loan, they will get back the crypto collateral they wanted.
Loan-To-Value (Ltv) Ratio
A Loan-to-Value (LTV) ratio determines the amount of collateral required for a particular loan amount. For example, an LTV of 50% means the loan amount (which you would receive) will be half of the deposited collateral. In other words, the borrower must deposit cryptocurrencies worth twice as much as the loan amount.
If the market value of the collateralized cryptos drops during the loan term, the LTV will rise in value. This would trigger a margin call requesting you to deposit additional collateral within a given period to restore the LTV agreed in the loan contract.
Failure to comply with this request — or if the LTV exceeds a critical value — the lending platform will automatically liquidate a portion of your collateral and use it to repay the loan until its value compared to the value of the collateral is reduced to the pre-agreed safety margin.
Collateralized cryptos always exceed the loan amount and are automatically liquidated when the value of the collateral comes close to the loan balance. As a result, the platform provider and its users are protected from default risks.
Benefits Of Borrowing Against Your Crypto
You may be wondering why a borrower doesn’t just sell his cryptocurrencies to get liquidity instead of borrowing against them. This is down to these benefits of crypto-backed borrowing:
- Preserve assets: It allows long-term crypto investors to raise liquidity without selling off their crypto assets.
- Avoid paying tax from gains on cryptoassets: It’s also a way to avoid paying crypto capital gains taxes, which you might have to pay if you sell your cryptocurrencies.
- No credit checks: It makes it easy for borrowers, especially institutional investors and crypto businesses (e.g., crypto mining farms), to obtain funding without encouraging many legal requirements.
- Rapid funding: Once your loan is approved, you can get your funds deposited into your wallet in as little as a few hours.
- Choice of loan currency: You can generally get the requested loan funds in fiat currencies or selected cryptocurrencies, depending on the platform.
How To Borrow Crypto Loans On Best Lending Platforms
We will look at borrowing on:
- Binance (crypto borrowing)
- Aave (crypto borrowing)
- Celsius (crypto or USD borrowing)
- Compound Finance (crypto borrowing)
- Resource Network (uncollaterized crypto credit borrowing)
How To Borrow A Loan On Binance
Binance – one of the best crypto exchanges in the world – allows you to borrow 65% of your collateralized crypto assets for a maximum period of 180 days.
The platform will automatically calculate the hourly and daily interest rates depending on the loan. For the example shown below, the interests are 0.002500% and 0.0600%, respectively.
Here’s how to borrow a crypto loan on Binance in two steps:
On the Binance website, click “Crypto Loans” on the Finance tab to get started. Using the Binance app, click “More” on the menu slab, and select “Crypto Loans”.
Choose the amount of asset to borrow and the corresponding collateral. (e.g., 1300 USDT loan for 0.539 worth of ETH in collateral). Select the Loan term (e.g., 7 days, 30 days, 90 days, or more). When done, check the order details and click “Start Borrowing Now” then click on “Confirm” to finish.
Over 65 crypto-assets can be borrowed or collateralized on Binance. Get started with borrowing on Binance by clicking here.
How To Borrow On Aave
Aave is an open-source and centralized liquidity protocol for earning interest on deposits and borrowing assets. Users can borrow from any cryptocurrency market pools listed on Aave for variable and stable interest rates. To do so, users will need access to a web 3.0 crypto wallet (e.g., Metamask)
Before borrowing, you must have a digital asset balance with Aave or deposit the cryptos to use as collateral. The amount available to borrow will correlate with the amount deposited as collateral. Aave uses dynamic systems to calculate the LTV. As with every crypto lending platform, all loans are over-collateralized, meaning the deposit has to be larger than the loan.
Here is how to borrow crypto on Aave:
- Step 1: Deposit collateral in your account, then navigate to the Aave home page to find the cryptocurrency you want to borrow.
- Step 2: Click “borrow” on the right of your screen.
- Step 3: Connect your web 3.0 digital wallet to the Aave platform.
- Step 4: Once connected, choose the amount you would like to borrow. You must then select either a stable or variable interest rate for the loan.
- Step 5: Select your preferred interest rate and confirm the transaction through your web 3.0 digital wallet. The loan would be disbursed to your wallet once approved.
How To Borrow On Celsius
Celsius is a leading centralized crypto lending platform with over one million users. Unlike the others mentioned on this list, Celsius allows you to collateralize your cryptos for real cash in US Dollars. However, you can still choose to borrow any of the 6 stable coins they currently support.
Here’s how to borrow from Celsius:
- Step 1: On the Celsius loan page, select the stablecoin you want to borrow or choose US Dollars if you want fiat currency.
- Step 2: Enter the amount you want to borrow. The minimum for stablecoins is $100, while for US Dollars, it’s $1000.
- Step 3: Pick the collateral you wish to stake. Celsius supports over 30 digital assets.
- Step 4: Pick a preferred interest rate. Your options are limited to 1%, 6.95%, and 8.95% interest monthly.
- The rates attract different LTVs, and selecting a higher interest rate means you can borrow a higher percentage of your collateral.
- For example, if you collateralize $2000 worth of ETH for a loan at a 1% interest rate, you will get only 25% ($500) of your collateral as a loan. Whereas if you selected an 8.85% interest rate, you would get 50% ($1000) as a loan. For 6.95% interest, the LTV is 33%.
- Step 5: Choose a loan term (maximum of 3 years) and confirm to finish]
That’s it for borrowing crypto on this crypto platform. Click here to start borrowing on Celsius.
How To Borrow On Compound
Compound Protocol is a DeFi crypto loan platform that allows borrowers to take a loan against their crypto balance. You can borrow from 19 crypto markets. Unlike some crypto-lending platforms where interest rates are fixed, Compound’s interest rates keep changing depending on the balance of a particular liquidity pool.
For example, suppose Blake has $10,000 worth of Bitcoin in their Compound account, and the borrowing limit is set at 60%, then they can borrow $6K worth of any cryptocurrency from Compound.
How to Borrow Crypto on Resource Network
If you read our post on obtaining crypto business credit, you would know that Resource is one of the best, if not the best platform, to obtain business loans. The reason is that it is uncollateralized and easy to get.
It works differently from all the other platforms mentioned in this article because it doesn’t require crypto collateral. So, you can borrow without holding your crypto down. All you need to do is this:
- Sign up on Resource Network
- Request crypto credit
- Offer services on the platform to pay back the credit
Not only are you growing your business and boosting employee morale, but you are also obtaining a loan that you can pay back by doing what you already do: offering your services or products.
Resource Network is open to registered businesses and self-employed persons.
Borrowing crypto has some good benefits, which we explored before looking at how to borrow above. If you still have any questions on crypto borrowing or any other crypto topic, drop them below in the comment section; we will respond as soon as possible.
Aside from crypto borrowing, there are many ways to get crypto, or even better, grow your wealth on the blockchain with many other strategies. Some are easier to do than others. To get a personalized strategy that fits your income and lifestyle, book an appointment with a crypto consultant.