What exactly is Crypto Lending?
Before we jump into revealing our top 10 selection of platforms below, I was really happy to get to write on the topic. Just a week ago my friend Marcus, who has been accumulating and holding onto Bitcoin for a few years now, having the time of his life, finally sobered up into a money-making mood, and asked me:
“Where should I deposit and lend my bitcoin for 10% compounded?”
So, the definition of crypto lending: Investors lend cryptocurrencies to borrowers in exchange for interest on the amount.
Investors can facilitate crypto lending and crypto loans via cryptocurrency lending platforms and lend their bitcoin and other cryptos.
Categories of cryptocurrency loans
There are two broad categories of cryptocurrency loans. These are:
- Custodial crypto loans These are centralized loans (CeFi) where the trader cannot access their collateralized assets as the lender controls the assets' private keys.
- Non-custodial crypto loans – These are decentralized loans (DeFi). In this model, borrowers and lenders depend on smart contracts. Additionally, the trader is always in control of the assets' private keys.
What do I need to take out a crypto loan?
Applying for a cryptocurrency loan is unlike the traditional finance process. Here, the loan-to-value ratio (LTV), the ratio between the loan amount and the collateral value. For instance, if you put $1000 worth of crypto and receive an $800 loan, your LTV ratio is 80%.
Risks involved in taking out a crypto loan
Unlike traditional finance, cryptocurrency assets are not covered by any federal body; thus, there is no federal insurance for losses made, and traders are exposed to the following risks:
- Technical Risk – These include protocol breakdown, hacking, protocol failure, and any other technical-related issues leading to losses.
- Counterparty Risk – As there are no regulations on the amount of liquidity a crypto lender is to keep, a sudden withdrawal or massive loan default may lead to the platform's collapse.
- Margin calls and forced liquidation – To prevent liquidity during market downturns, a platform may require borrowers to increase their collateral or forfeit a portion of their deposit, which leads to losses.
How are crypto loans taxed?
Because the IRS considers Crypto-assets as property, the use of cryptocurrency as collateral to get a loan is not considered a sale; therefore, it is not taxed. However, crypto loan fees and interest charged on loans attract some form of tax.
What are the important parameters for the best crypto lending platforms?
In our analysis, these are the guidelines we employed:
- Interest rates
- Supported crypto
- Flexibility
- Restrictions
- Community feedback
The Top 10 Highest Yielding Crypto Lending Platforms
Wondered how to lend your Bitcoins? Or what kind of yields are possible through lending cryptocurrency and crypto loans?
The following table summarizes what we believe are the optimal crypto lending platforms allowing users to receive the highest yields through their crypto loans.
