Basics of Crypto lending
Finance is quickly evolving before our eyes. Let’s look at a few key definitions to create a framework for this space:
- A business that uses technology to improve and automate a financial service operates in the Fintech industry.
- Blockchain Technology is growing exponentially and a sector that is benefiting from it is definitely Finance. Crypto lending = cryptocurrency and lending
- P2P lending (Peer-to-peer lending), matches lenders with borrowers via an online platform. Crypto lending does the exact same thing by using cryptocurrency instead of fiat.
The goal of a lender is to be remunerated for lending the asset.
The goal of a borrower might be that he/she believes a certain coin will appreciate in value therefore will borrow such coin with the hope to pay it back with interest to the lender and keep the difference from price appreciation.
If you own cryptocurrencies that you have no intention to use in the short term (just like you would do with fiat money [US $] in a saving account or certificate of deposit) you can lend them out and earn interest income. Alternatively, you can post your crypto as collateral for a loan if you need access to fiat but do not wish to sell your crypto assets.
Non collateralized crypto loans exist on a variety of platforms however they are generally complicated.
Avoid a taxable event
You are able to retain control of the crypto asset by lending it and accessing a line of credit instead of being forced to sell in order to obtain liquidity.
Investors would want to hold assets for more than 12 months because long term capital gains are taxed lower than short term capital gains. Sometimes much lower.
In another article we will cover the two categories of crypto loans: the ones from DeFi platforms (decentralized finance) and the ones from Custodial companies.
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