How Do Crypto Backed Loans Work?

How Do Crypto Backed Loans Work?

New financial products are entering the market all of the time, and crypto-backed loans are one of the newer options available today for those looking

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New financial products are entering the market all of the time, and crypto-backed loans are one of the newer options available today for those looking to lend money. Crypto loans tend to have terms of a few weeks or months, with around two years being the maximum lending period. You will need to look to a specialist lender for this type of loan, and below, we will tell you more about how they work so you can get a better understanding.

Lenders will typically offer you a loan as a percentage of the value of the crypto coins you wish to use for security. If you want to go down this lending option, you will typically need to have a considerable amount of cryptocurrency investments and they will need to be mainstream. The reason for this is that loans tend to begin from around £100,000 upward. A 50 per cent loan-to-value ratio (LTV) is standard, so this will need a cryptocurrency portfolio that has a value of £200,000 at a minimum.

In theory, there is no upper limit when it comes to cryptocurrency finance. It is very possible to borrow several million pounds (or the equivalent in another currency), if your portfolio supports this level of borrowing.

How much will you be able to borrow?

The value of your cryptocurrencies will influence how much money you can borrow because the lender is going to need to factor in any possible fluctuations in terms of your cryptocurrency’s value. If your cryptocurrency dips beneath a particular value throughout the term of your loan, you may need to supply extra cryptocurrency as collateral. If you do not wish to do this or you are unable to do this, your lender may sell a portion of the existing assets to reduce the loan. If you were to default or miss repayments on your loan, the lender is also allowed to sell your cryptocurrencies so that they can recoup this.

What cryptocurrency can you borrow against?

In theory, you will be able to borrow against any mainstream cryptocurrency that has a sizable market cap and which you can easily liquidate. The most common types of cryptocurrency used for these loans include Cardano, Litecoin, Ethereum, and of course, Bitcoin. However, this can differ from lender to lender. As new cryptocurrencies rise to prominence and their valuations increase, lenders that are active in crypto finance will consider lending against them, so the assets you are able to use for these sorts of loans will change as time goes on.

Final words on crypto-backed loans

So there you have it: everything you need to know about crypto loans. We hope that the information that we have provided you with above has given you a better understanding of what these loans are and how they work. If you have any questions, the best thing to do is speak with a broker who can provide you with professional advice and assistance so you are aware of all the risks and opportunities open to you.