What is a loan secured by cryptocurrency
A loan secured by a cryptocurrency works like a regular loan: a borrower takes a loan for a specified period and leaves a value as a security, in our case, a cryptocurrency. When the deadline expires, the borrower must repay the loan amount and interest in the same currency in which he borrowed. The loan can be obtained in national currency (RUB, USD, EUR) or in a digital asset (BTC, ETH, DOGE).
How does a loan secured by cryptocurrency work
Due to the volatility of cryptocurrency prices, the value of collateral may rise or fall, but the loan itself is always fixed in fiat money. If the price of bitcoin has risen during the time of using the loan, the borrower can return the loan with a profit. Here’s how it works:
Starting Bitcoin Price: $ 3,800.
Credit rate: 8% per annum.
Loan amount: $ 15,000.
Loan term: 180 days.
Deposit amount: 5.86157174 BTC
Starting Collateral Value: $ 22,273
Bitcoin final price: $ 10,000.
Accrued interest: $ 590.
Amount to return: $ 15 590.
Refundable security deposit amount: 5.86157174 BTC
Final collateral value: $ 58 615
Borrower income from the transaction: $ 35,752.
On the Biterest platform, the loan currency is the US dollar, therefore, all amounts are fixed in USD. Credit can be obtained in fiat money or cryptocurrency. Settlements for transactions are made based on the current exchange rate of the issuing currency to USD.
Why do we need cryptocurrency loans
Cryptocurrency loans are an alternative to exchanges and exchangers. Such loans are needed so as not to sell cryptocurrency at an unprofitable rate and thereby preserve a digital asset that can grow in value.
The main difference between loans with cryptocurrency collateral and traditional analogues is the high volatility of digital assets that act as collateral. This is the main value of such a service: if the collateral grows in value, the operation will be profitable for the borrower. For the lender, profits are always fixed in USD.
Where is the deposit kept
There are two options for storing collateral:
- The security is held by a third party. This option is offered by platforms that lend themselves. In fact, they get the cryptocurrency of users in temporary possession. Also, this option is offered by some p2p services that provide a platform for interaction between lenders and borrowers. The borrower transfers the security deposit to the address indicated by the service, and the lender issues the money. When repaying a loan, everything happens in reverse order.
- The p2p platform stores the pledge on a multisig address. In this case, the platform acts as a guarantor of compliance with the terms of the transaction. For each transaction, a new multisig address is created from the public keys of the borrower, lender and the platform to which the pledge is transferred. One private key remains with the borrower, another with the lender, and a third with the platform. Funds are released when 2 keys out of 3 are entered.
Biterest stores the collateral on a multisig address. The platform does not store funds and private keys of users. Prior to closing the transaction, neither party can gain access to the pledge.
Under what conditions can I get a loan with a cryptocurrency pledge
Platforms that provide loans from their own funds and store user assets in themselves, establish conditions for loans. They determine the minimum and maximum loan amounts, interest rates, discount, “loan / pledge” ratio (LTV) and terms. In p2p lending, borrowers and lenders agree among themselves and choose the terms themselves.
At Biterest, users can fully formulate loan conditions without restrictions: the platform does not impose mandatory requirements on the amounts, terms, interest rates and discount.
How is the amount of the collateral determined
The cost of collateral in any type of loan should be higher than the loan amount. The amount of the pledge depends on the amount of the loan, the annual interest rate, the term of the loan and the discount – the “safety margin” of the pledge.
The discount indicates how much the collateral currency may fall before the value of the collateral equals the amount of the loan and the transaction is closed (this is called a margin call or margin call). The greater the discount indicated by the borrower, the greater the amount of the deposit.
What documents are needed to get a loan secured by cryptocurrency
Platforms that store money and pledges of users put forward strict conditions for obtaining loans. This is due to money laundering and terrorist financing laws. Such platforms are required to conduct the KYC procedure, in which the user must provide their passport data and other personal information.
On p2p platforms, the registration procedure usually does without passport data and is limited to entering an email address, username and password, but the requirements may vary depending on jurisdiction.
To register on Biterest, you need a minimal data set: email and login with a password. The platform does not collect user personal data.
Most platforms give out loans in USD, but you can choose other fiat money or cryptocurrencies.
How is a loan secured by cryptocurrency
A platform that issues loans on its own, transfers them through bank transfers or credits stablecoins like Tether (USDT) to the borrower’s account. P2p services use bank transfers and payment processor services.
On Biterest you can work with payment processors WebMoney, Qiwi, Yandex.Money and PayPal. Bitcoin, Ethereum, Litecoin, Bitcoin Cash, and Ripple are also supported.
Why get a cryptocurrency loan secured by a cryptocurrency
When issuing a loan in cryptocurrency, its price is still calculated in USD at the time of the transaction. Cryptocurrency here is a way of transferring funds. When repaying a loan, the borrower returns the same amount in USD as he took, along with interest. If the price of cryptocurrency has grown during this time, then in terms of it the borrower will return less than he took. Long-term investors can profit from an increase in the value of not only collateral, but also the body of the loan.
For example: a borrower takes $ 1 thousand in bitcoins at a price of $ 3,800 for 1 BTC and receives 0.2632 BTC. When the price of bitcoin rises to $ 10 thousand, it will return $ 1 thousand, but now it will be 0.1 BTC.
Another plus of credit in cryptocurrency is faster transactions compared to bank transfers. At the same time, the borrower does not provide personal data to a third party and may not be afraid of assets freezing.
What will happen if the cryptocurrency exchange rate in the pledge changes
If the rate of the cryptocurrency collateral is growing, the value of the entire collateral is also growing. When the rate falls, the total value of the collateral falls.
If the value of the collateral falls to the amount that the borrower must repay, a margin call will arise. This means that the transaction is closed, and the collateral is transferred to the creditor to pay off the debt. Thus, the lender receives his investment, and the borrower leaves the loan amount, but loses the collateral. For the borrower, the situation is equivalent to selling cryptocurrency at a market rate.
The risk of margin requirements depends on the percentage of discount indicated by the borrower. The greater the discount, the lower the risk of closing a transaction due to margin requirements.
What will happen if you do not pay the loan
On p2p cryptocurrency lending platforms, disputes are resolved through the use of multisig wallets. If the borrower has not paid the debt on time, the platform transfers its private key to the lender, which unlocks the multisig address and reimburses the loan amount against the security deposit.
At Biterest, the borrower provides a guarantee in cryptocurrency.
Choose a platform that does not store your money and private keys. Pay attention to the volatility of the collateral currency and the loan term.
The greater the discount, the further the margin requirement. Biterest recommends setting a discount of at least 30%.
Not ready to disclose passport data – use a platform without KYC.