Cryptocurrency enthusiasts are generally thrilled to hear about anyone investing in their favorite asset class. But the crypto-backed loans market is relatively new, and it requires some explanation.
In a typical cryptocurrency-backed loan, a borrower invests a certain amount of cryptocurrency with the lender, who then uses that cryptocurrency as collateral. The lender must then pay back the principal and interest with interest. If the value of the cryptocurrency fluctuates in response to market forces, so does the loan balance; if the borrower defaults (or stops paying), the lender has lost money.
Crypto-backed loans are not new; many early investors used them to speculate on a cryptocurrency’s future price. But because of regulatory issues in many countries, this type of lending is much more difficult now than it was when Bitcoin was small.
The most popular currency is Ethereum, whose price has soared in recent months. The biggest lender of Ethereum loans is actually a company called Bitbond, which has been offering Ethereum loans for over six years:
There are a lot of cryptocurrencies in the world. But most of them are not widely used. The only crypto-backed loans we know about are those proposed by Bitcoin and Ethereum, and they don’t seem to have gotten very far. That makes it hard to figure out what people who want to borrow cryptocurrency should do.
Bitcoin is a great example of how money works. Bitcoin itself is just numbers in a database; when you spend Bitcoins, they get moved out of your account and into someone else’s. You do that because you want to buy something with them, or because you want to send money to someone else.
But if you want to loan someone Bitcoin instead of giving them cash, what you really want is for them to turn the Bitcoins into something else, and then give you that new thing(s). So, for example, if I want to lend you $100 in Bitcoin, I would like for you to turn those $100 worth of Bitcoins into two things: a $100 bill and an apple. Then all I have left is $80 worth of apples and $20 worth of bills.
If all these things are easy, convenient and cheap enough that 1% interest is enough to be reasonable, then this isn’t going to be hard at all
The most obvious way to make money with cryptocurrency is to buy it and hold it, hoping that its value will go up. But there are other opportunities.
Before I explain these options I want to mention a warning. Cryptocurrencies have been used for illegal transactions, including drug deals and ransomware attacks, so they can be dangerous if you don’t know what you’re doing. If you’re a beginner, you should probably stick with buying and holding; these risks are only minor compared to the risk of losing your investment if something goes wrong.
But if you are an experienced investor, there are other ways to get some of the benefits of cryptocurrency without all the risks. One way is through a kind of cryptocurrency-backed loan. One cryptocurrency has a standard unit of account called a satoshi (symbol: ฿). A few other cryptocurrencies also use satoshis as their unit of account (for example, litecoin), but no cryptocurrency uses satoshis as their symbol; that’s reserved for bitcoin (BTC). In this article I will use BTC as an example; other cryptocurrencies follow similar conventions.
A common way to borrow money in bitcoin is by first giving a lender 100% ownership of your bitcoin. Then you can sell or trade them back to
If you want to earn money, the obvious thing is to lend money. But if you want to lend money in a way that earns interest for you, the obvious thing is not to lend money at all. If you’re going to spend your time earning interest, why would you lend it out?
Finance is a trade. It’s not like selling things. It’s like selling services. You can’t be a banker and get paid interest on your deposits. If you’re going to give someone your money, you want something in exchange: they pay you interest and you pay them back some other service like buying a car or a house or whatever. You don’t get paid by the people getting the money or by their friends or by the government or anything else; you get paid by giving them something they want and they give it back to you.
This is how banking works: banks are just private businesses that take deposits and make loans out of them. The difference between banks and ordinary businesses is that banks don’t have to make things; they can just buy things on credit, instead of selling things for cash up front.
Like business loans, bank loans are made on the basis of economic risk: what happens if the borrower is unable to pay?
The interest rate on the cryptocurrency lending platform BitLendingClub is just 0.1% per month. That’s high, but not the highest of its kind in the world. The best interest rate is a whopping 1.5% per day on the highly competitive platform Bitfinex, whose operators have something to do with Tether, an organisation that claims it can secure crypto-tokens via a dollar peg (and which has recently been declared a “money service business” by the US authorities).
Most cryptocurrency platforms offer variable interest rates, which means they can be variable only within very narrow boundaries. The high interest rate on BLC means that you are guaranteed not to lose money on your investment, even though you don’t get paid interest at all.
There is another feature of BLC that is interesting: if your account balance goes below zero (the minimum deposit amount), the company pays you interest automatically and without notice until your balance goes above zero again. It is a kind of automatic negative interest rate; if you want to borrow money from BLC, you have to pay interest on it as well as receiving it.
BLC’s approach makes a good deal of sense in an uncertain world where no one knows for sure whether bitcoin will continue to be
The holy grail of finance has been to find a way to do banking without banks. In the early days of cryptocurrency, before it was clear what a blockchain was, cryptographers were enthusiastic about making a digital currency that would be as safe and as profitable as gold, with none of the hassle or volatility.
This is an idea I came across about two years ago and have been following for some time. It’s called “cryptobanking”.
Cryptocurrency is a new type of money, and it can be hard to understand exactly what it does. The most important thing about cryptocurrency is that it’s not really money at all. It’s a technology, like the internet or email or search engines: something that has value because of what it does.
Cryptocurrency has value because it can be used as a means of exchange. You might as well think of cryptocurrency as a way of doing business. If you want to buy something from someone who doesn’t have much money, you’ll often want to pay in cryptocurrency.
The most stable store of value over time is gold and the most stable store of value over space is diamonds. But like these other things, cryptocurrency can also be more useful than either of these two ideas suggests at first glance.