Crypto loans, also known as crypto-backed loans, are a type of loan where borrowers use their cryptocurrency assets as collateral to secure a loan from a lender. Here's how it typically works:
The borrower deposits their cryptocurrency as collateral with the lender.
The lender then provides the borrower with a loan in fiat currency or stablecoin, which is typically a percentage of the value of the collateral deposited.
The borrower repays the loan with interest over a specified period of time.
Once the loan is repaid in full, the borrower's cryptocurrency collateral is returned to them.
Crypto loans are becoming increasingly popular because they allow cryptocurrency holders to access liquidity without having to sell their cryptocurrency assets. This can be beneficial for individuals who want to hold onto their cryptocurrency for long-term investment purposes, but also need access to funds for immediate expenses.
Additionally, crypto loans may offer more flexible terms and lower interest rates compared to traditional loans because they are secured by collateral. However, borrowers should be aware that the value of their collateral can be volatile and may fluctuate during the loan period, potentially resulting in a margin call or liquidation of their collateral if the value drops too low.