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The Pros and Cons of Bitcoin Lending

Bitcoin lending is becoming an increasingly popular trend globally. Many investors want to generate passive income by investing in Bitcoin-backed loans. Several Bitcoin lending platforms enable such investors to earn passive income from their capital.

The crypto hype has also prompted investors to find ways to hedge their current position and benefit from this digital asset without the liquation of their portfolios. But some people don’t know much about Bitcoin lending, its pros, and cons. And that’s what this article will explore.

What is Bitcoin Lending?

Maybe you know you can purchase Bitcoin on a crypto exchange like bitcoin revolution but don’t know how to lend this virtual currency to other people. Well, Bitcoin lending involves an investor, who lends a crypto asset or fiat money to a borrower, and gets interests in return. A borrower deposits Bitcoin or crypto assets as the collateral that secures the investment for the investor.

The Pros and Cons of Bitcoin Lending

If you’re interested in Bitcoin lending, you can do so via a peer-to-peer crypto lending platform that connects investors and borrowers. Ideally, a peer-to-peer lending platform allows you to sign up and deposit the funds you want to invest. Once you’ve done that, select an investment product and then invest in the secured loans. The borrower will repay your principal amount and the interest to the same account.

Pros of Bitcoin Lending

Investing through Bitcoin lending comes with several advantages to institutions and individuals. Accessing Bitcoin loans is more straightforward than accessing traditional banking services. A holder can get an interest in the amount they invest through crypto lending.

Here are the primary benefits of Bitcoin lending:

  • Bitcoin lending doesn’t require a bank account
  • Interest rates are pretty attractive
  • Transaction fees are relatively low
  • The lending and borrowing procedures are faster and simple
  • Bitcoin lending provides diversified loan portfolios
  • No geographical limitations

Bitcoin lending platforms are decentralized and centralized. The centralized platforms enable the user to borrow fiat currency against their Bitcoins, serving as collateral. With this option, 50% LTV is a common requirement, meaning the collateral should comprise 50% of the money you borrow.

Once you’ve paid the debt, you receive the collateral back. If not, the lending platform liquidates it. Centralized lending platforms have varying interest rates, and the lender earns interest from their deposits.

Smart contracts are the basis of decentralized lending platforms. The system automates the repayment and distribution of the loans. What’s more, the borrower doesn’t need collateral. Since these platforms don’t have KYC data collection, borrowers get faster loan processing and low transaction fees.

Cons of Bitcoin Lending

Most conventional loans have insurance. Bitcoin loans, on the other hand, have a higher default probability. Unfortunately, Bitcoin lending platforms don’t have insurance. That means they can’t compare to ordinary loans in terms of security.

Additionally, Bitcoin lending platforms operate on the internet. That means borrowers and lenders have a higher risk of cyberattacks. Volatility is also a significant drawback since the lender will suffer greater losses than the interest earnings if the currency rate drops. What’s more, taxing the Bitcoin lending platforms is something that attracts different jurisdictions. Thus, government taxation could eventually reduce the earnings of the Bitcoin lenders.

Final Thoughts

Bitcoin lending platforms allow people to lend and borrow funds using a collateral-based system or intelligent contracts. They create an innovative environment where people can capitalize on deposits. However, the lack of insurance, volatility and higher chances of default make Bitcoin lending disadvantageous, especially for lenders. Nevertheless, many people have used Bitcoin lending to raise capital, increase their savings, and grow their investments.

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