Crypto Loan

A crypto loan is a type of loan where borrowers use their cryptocurrency holdings as collateral to obtain fiat currency or additional cryptocurrencies. This financial service allows individuals to access liquidity without needing to sell their crypto assets, thus enabling them to maintain their exposure to potential price appreciation. Here's how it typically works:

• Borrower applies for a loan: The borrower applies for a loan from a crypto lending platform or service provider. They specify the amount of fiat currency or cryptocurrency they wish to borrow and the duration of the loan.
• Collateral deposit: The borrower then deposits a certain amount of cryptocurrency into a smart contract or a designated wallet held by the lending platform. The value of the collateral usually exceeds the amount of the loan to provide a buffer against price fluctuations.
• Loan approval and disbursement: Once the collateral is deposited, the lender evaluates the borrower's application and assesses the value of the collateral. If approved, the loan amount is disbursed to the borrower's account.
• Loan repayment: The borrower makes periodic interest payments during the loan term. They can choose to repay the principal amount at the end of the term or make partial payments to reduce the outstanding balance.
• Collateral release: After the borrower repays the loan in full, including any interest accrued, the collateral is released back to the borrower. If the borrower fails to repay the loan, the lender has the right to liquidate the collateral to recover the funds.

Example:

Let's say John owns 10 bitcoins valued at $50,000 each, totaling $500,000. He needs some immediate cash but doesn't want to sell his bitcoins because he believes their value will increase in the future. Instead, he decides to take out a crypto loan.

John applies for a $50,000 loan from a crypto lending platform and deposits 5 bitcoins as collateral. The lending platform evaluates his application and approves the loan based on the value of the collateral.

The loan agreement specifies a 12-month term with an annual interest rate of 8%. John makes monthly interest payments of $333.33 ($50,000 * 8% / 12) for a total of $4,000 over the year.

At the end of the term, John repays the $50,000 principal amount. Since he has fulfilled his obligation, the lending platform releases the 5 bitcoins back to his wallet.

In this example, John was able to access liquidity without selling his bitcoins. If the value of bitcoins had increased during the loan term, he would have benefited from the price appreciation while still having access to the initial loan amount. However, if the value had decreased, he would have risked losing his collateral or needed to provide additional funds to cover the shortfall.