Many people want to accumulate wealth through investments, but they often don’t know where to begin. The usual method of choice is to invest in stocks, but the stock market is tough to break into.
In recent years, more people have turned their eyes to cryptocurrency. This field of investment achieved a particular allure in 2017 when a boom in the market sent Bitcoin’s value skyrocketing.
If you’re like most people, you’re probably wondering if you can accumulate wealth through cryptocurrencies. If so, the answer is yes. This is particularly true if you can master crypto lending.
To profit from cryptocurrency, it’s imperative to learn effective crypto lending techniques. In this article, we’ll give you some beginner’s tips to get you started.
How Does Crypto Lending Work?
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If you’re new to cryptocurrency, you may not know much about crypto lending. That’s okay! In this section, we’ll briefly explain how lending works. If this is already familiar to you, feel free to skip to the next section.
Crypto lending contributed significantly to the growth of the decentralized financial ecosystem over the past few years. It’s essentially a system of collateral that grants new, uninhibited access to different financial services.
How do you access those financial services? Basically, you use your cryptocurrencies or other crypto assets as collateral to acquire a loan. On the other hand, if you happen to be the lender, you can provide the assets needed for someone’s loan at a fixed interest rate.
This benefits borrowers as they gain access to previously unpossessed capital. Lenders, however, turn a profit through the interest they charge. If you’re aiming to build your capital, then the better position for you is that of a lender.
What are the differences between crypto loans and traditional loans? One of the top differences between them is that crypto loans don’t require a credit check. The only checks you may encounter are those that typical KYC verification may require.
The second primary difference is that standard loans have a third party, i.e. a bank, standing between the lender and borrower. Instead, crypto lending takes place on a person-to-person, or P2P, basis.
Getting Started: Choose a Platform
There are two primary types of cryptocurrency lending platforms. The first type is a centralized platform, and the second is decentralized. Centralized lending platforms function like other, more mainstream platforms.
They follow KYC and AML procedures, feature protocols to protect assets and observe loan agreements with various financial institutions. Another feature of centralized platforms is that they determine the interest rates for lenders.
Decentralized protocols do not necessarily follow KYC or AML protocols. Anybody can access these platforms without the need for identification. Decentralized platforms also tend to feature fluctuating interest rates, which can sometimes be rather drastic.
This fluctuation usually stems from the supply and demand for a particular asset. None of this is to say that these platforms are unsafe. Instead, they use different security protocols than the typical bank account.
The primary source of security is a system called blockchain, which forms the basis of cryptocurrency security. There are always risks when you make online transactions, but blockchain provides tremendous transparency.
This transparency makes all transactions trackable. That way, if a hacker interferes with a transaction, you can retrieve your assets. To learn more about a reputable lending protocol, check out this article.
Layers of Lending
Many people enter the crypto world thinking that because a cryptocurrency is a “currency,” it must be like regular printed money. It’s better to get out of this mindset. When you lend cryptocurrencies, you’re lending something that has a common unit of account.
So, cryptocurrencies function similarly to money without being money itself. This information matters because it helps make sense of the three lending options in cryptocurrencies.
The first option crypto lending options are Layer 1 Networks, including Bitcoin, Ethereum, or Litecoin. These currencies power their tokens (think of these as a digital coin or dollar) through their blockchains. This process is the one most similar to how a Central Bank creates money.
The next option is lending Stablecoins, such as USDC, DAI, or USDT. These are often safe investments, as they link their price to the US dollar. While they are not themselves official US currency, they use the US dollar to keep their prices stable.
The final option is to use an alternative, usually Ethereum-based, tokens. Ethereum’s network allows developers to create their tokens, which is part of its appeal as the second most valuable cryptocurrency.
Because Ethereum’s system generates these tokens, they are generally compatible with one another. This compatibility allows lenders to trade them with ease.
Crypto P2P Lending Considerations
For most of cryptocurrency history, the only ways to make a profit were to hold on to your crypto until it would appreciate or trading it on a highly volatile market.
Lending offers you a much safer and attractive alternative. Through interest you accrue in the loan, you can potentially make 10%-12% on your assets through lending platforms.
To get started, first, you must figure out which of the three options from the previous section you want to buy into. You can likely make the most by lending Bitcoin. However, maybe you want to play it safe and loan more consistent options like Stablecoins.
Next, you’ll want to consider what type of platform you want to lend through. Do you prefer the security of centralized platforms or the profits from decentralized platforms? Once you know which type to choose, you can look for reliable platforms on which to borrow and lend.
When you enter into the volatile world of crypto lending, you can earn tremendous profits. However, the lack of oversight in this world can also leave you vulnerable to various online dangers. Be sure you know the risks involved before you begin lending and borrowing.
We hope you enjoyed this article! If you want more financial tips, check out our other content today!