Crypto investors are pledging their digital assets to buy homes, cars and more crypto by securing loans through crypto exchanges or crypto lending platforms that are quickly becoming the new craze in the cryptoverse.
Cryptocurrencies such as Bitcoin and Ether are being used as loan security by investors who pledge a portion of their crypto assets as collateral for the money they borrow.
Lenders take deposits in form of cryptocurrencies, which earn higher-than-average interest rates. The crypto deposits are used to fund loans to borrowers who pay it off over time.
Cryptocurrency lenders take a similar approach as traditional banks, but unlike banks, which are regulated by the government and are required to have reserves of deposits to protect them from bad debts, crypto lenders are not regulated to the same standards.
Crypto-backed borrowers keep ownership of the assets they pledge to the lender while paying off the loan. However, they risk losing a significant amount of their collateral if they default on their payments, just like one would with a secured loan such as a car or mortgage loan.
These new loans come in many forms. Borrowers can get dollars or other traditional currencies, or stable coins – any cryptocurrency designed to have a relatively stable price – depending on the lender.
Some people opt for crypto loans because they do not want to use their crypto assets soon aka hodl.
“The idea is to shift some of