Those funds could then be used for a purchase or to invest in a business, similar to borrowing with a personal loan.
The problem of crypto loans
The unsteady value of crypto can lead to a margin call, where the borrower must put up more crypto in order to maintain the value of the initial pledge.
From April 2021 to October 2021, bitcoin’s price fluctuated between about $30,000 and $64,000.
A crypto loan may make sense if someone holds a substantial amount of crypto and wants to liquidate it without having to sell and possibly pay taxes on it, says Gatzemeier.
Additionally, borrowers could see lower interest rates with a crypto-secured loan. And unlike personal loans, there’s no credit check.
If the value of your pledged crypto declines below a threshold set by the lender, then you have a limited period of time to pledge additional crypto.
In crypto-speak, the ratio of the loan amount to the value of your collateral is called loan-to-value or LTV. For example, crypto lender BlockFi’s maximum LTV is 70%. At that threshold, borrowers have 72 hours to increase the crypto.