Taking out loans is a part of everyone’s financial life, starting as early as 18 with student loans. Then, you can take out loans for houses, cars, and other major financial purchases in your life. Usually, you do this by going to a bank and filling out tons of paperwork, and for a reason too. Defaulting on a loan is never a good thing, so banks need to prepare things like collateral and make sure you are financially prepared. However, like we’ve learned in the past year, unusual is the new usual.
Recently, people have been tapping into the crypto space for loans, receiving them from nonbank lenders and blockchain platforms. Deposits are in the form of cryptocurrency, and the deposit is used as the collateral for the loan. Crypto users borrow against their wallets for multiple reasons as interest for one is much higher, and capital gains tax can be evaded. This business is booming with one group of crypto lenders having 25 billion dollars in loans, although risks are present. If crypto prices fall, which they can do easily, the value of the borrower’s collateral falls which could lead to a margin call. These “banks” are also at risk from digital robbery, which could hurt borrowers more as there is no protection. This is crypto, after all. People use it to amplify their bets, like a margin account from a brokerage, and others use it like a normal loan to jumpstart projects and businesses. Regulators do have their eyes open as the SEC is on Coinbase’s heels for proposing a similar crypto-lending program, but this is just another unique way crypto has disrupted the finance industry. Will you ever take a crypto loan?
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.