Should You Borrow Against Crypto?: Pros and Cons

Mar 10, 2022
3 min read

The growing popularity of bitcoin and decentralized finance, in general, has opened up some endless possibilities. The ability to borrow against cryptocurrency, for example, is undoubtedly altering the future of borrowing.

We'll go through the pros and cons of borrowing against crypto, so you can make wise decisions about how to use your assets.

Pros of Borrowing Against Crypto

Other benefits of crypto loans, including cheap interest rates, quick access to cash, and diversification options, appeal to a broad spectrum, particularly those aiming to migrate away from traditional finances or those seeking the highest possible interest rate.

No Bank Account

While the lack of a bank account may appear to be a strange benefit, for many, advances in crypto borrowing signify a step closer to a decentralized financial system.

Decentralized currency's main purpose is to give you more control over your finances by eliminating the need for third parties or intermediaries like banks. This is another financial activity that does not involve using a bank for individuals interested in achieving this goal.

No Background Checks

If you've ever sought a loan only to be turned down, you understand how frustrating it can be to have a barrier like poor credit prevent you from receiving financial aid. Crypto loans are a lot more available now.

As mentioned previously, the exchanges that hold you responsible for the loans you take out simply worry about whether you have the required assets. After then, the only thing standing between you and your crypto is your responsibilities as a borrower.

Easy Transfer of Funds

Cryptocurrencies have maintained their status as the best trading option. Cryptocurrency trading, both international and domestic, is very fast. This is because verification takes a small amount of time, as there are only a few obstacles you have to overcome.

Cons of Borrowing Against Crypto

When determining whether or not to borrow against cryptocurrency, numerous factors must be considered. If you're not careful, this invention might rapidly turn into a nightmare due to insurance restrictions and the process's relative newness.

Crypto Volatility

If you've ever heard of the term "cryptocurrency," you've undoubtedly also heard of the term "volatility" in the near future connected with it. The highs and lows are unavoidable in this profession because practically everything is new and continually evolving.

While there are other factors at play, overall skepticism about the future of cryptocurrency is a major factor. Due to this volatility, the coin being borrowed against may fluctuate, resulting in unfavourable outcomes like margin calls.

Margin Calls

You will be informed to receive a margin call from your exchange at any time during the payback duration of a crypto loan. This indicates that your LTV has above a specific threshold, requiring you to contribute more bitcoin to meet the minimum loan coverage requirement.

While the specifics of margin calls will be mentioned in the loan agreement, receiving this request can be disappointing. You might not have the necessary additional crypto on hand, and providing more collateral can make it feel like there's more to lose.

Regardless, the idea for both you and the lender is for you to reclaim all of your possessions at some point in the future. After a margin call, the implications of not depositing additional crypto present a bleak picture.

Liquidation

If the margin call is not fulfilled and the price continues to climb, the Liquidation LTV level is reached. At this point, some of your assets will be liquidated to cover the margin call. All the assets you hoped to get back are suddenly being depleted.

It's crucial not to overborrow because of margin calls and liquidation. We propose reserving crypto-assets in case more collateral is required in the event of a margin call. This will help to avoid liquidation and any unneeded fund losses.

Should You Borrow Against Crypto?

Borrowing against cryptocurrency is one of many ways to benefit from the rise of decentralized finance while also increasing your wealth. When the volatility costs are weighed against the benefits of cost savings, diversity, and accelerated approvals, the benefits of diversification, cost savings, and expedited approvals can be seen.

When borrowing with crypto, the essential thing to remember is choosing the correct exchange and completely comprehending the loan terms. At Vauld, we provide seamless communication so that all of our customers can benefit from the advantages of cryptocurrency.