February 22, 2023
Why Should Crypto Users Take Loans Against Their Holdings?
Why crypto users should consider taking a loan instead of selling their Bitcoin and the drawbacks of traditional custodial loans.
The second half of 2021 was a challenging time for the cryptocurrency market, especially the crypto lending sector. As the bull market began to fade, lending and borrowing activity appeared to be dwindling. Additionally, major players like BlockFi and Celsius were filing for bankruptcy, leading up to even larger collapses such as what happened with FTX.
As centralized crypto lending recovers and improves its risk management, decentralized lending platforms have continued to gain popularity. According to Dune Analytics, decentralized finance (DeFi) has experienced a 40-fold increase in growth since 2020. Blockchain analytics firm DeFi Pulse estimates the total value locked (TVL) in DeFi protocols to be $80 billion, representing a 10-fold growth since May 2020.
This article will discuss why crypto users should consider taking a loan instead of selling their Bitcoin and the drawbacks of traditional custodial loans.
Why Selling Your Bitcoin May Not Be Ideal
Crypto users can benefit from taking loans against their crypto holdings in several ways:
- Save Money: In countries that treat crypto as capital gains, such as the US, Canada, and European Union countries, crypto users are taxed on profits from converting digital assets to fiat and on every trade. They also incur service fees, including withdrawal and crypto credit card charges. Crypto loans are not subject to these tax implications and service fees, allowing users to keep their crypto while spending some of its fiat-value to support themselves financially.
- Holding Long-term Investments: For those who bought Bitcoin as a long-term investment, historical returns and popular investor sentiment still indicates this to be a good strategy. Although prices may fluctuate, they can also continue to rise. However, if the investor needs funds urgently for another investment opportunity or personal reasons, they can take a BTC-baked loan without selling or losing ownership of their Bitcoin.
- Earn While Holding Bitcoin: As Bitcoin holders wait for their long-term investment to grow, they can still earn passive income from their idle Bitcoin. By taking a loan on their holdings, they can diversify their investments by deploying capital to another investment strategy. Portfolio rebalancing and diversification are important for managing risk in the volatile crypto market.
- Avoid Borrower's Risk: Crypto lending involves over-collateralization, which eliminates the need for credit checks and reduces the risk of delays. Defaulting on the loan does not lower the borrower's credit score. Moreover, DeFi lending platforms cannot close the borrower's account or prevent them from taking another loan. As a result, taking a loan on your Bitcoin helps you avoid borrower risk.
Drawbacks of Traditional Custodial Loans
A custodial loan is a type of loan where the borrower pledges assets, such as stocks or bonds, as collateral. The pledged assets are held by a custodian and act as security for the loan.
Traditional custodial loans come with loan fees, including origination, application, appraisal, and more. These fees can add a significant amount to the overall cost of the loan, making it harder for the borrower to repay the loan or even consider taking it. Moreover, traditional custodial loans may have prepayment penalties, a fee imposed on borrowers if they choose to pay off the loan before the agreed loan term. These fees are difficult to plan for if the borrower has variable income. This can create a barrier for the borrower if they achieve financial stability and want to pay off the loan early. The application process for custodial loans can also be lengthy and time-consuming, taking several weeks or even months for the loan to be approved and disbursed. This can be inconvenient for borrowers who need the money quickly and can make it difficult for them to plan and budget for the loan.
How DLC.Link Solves Both Problems
DLC.Link connects the benefits of borrowing funds against your Bitcoin, without the hassle of traditional custodial loans. Through our hybrid on-chain and off-chain Bitcoin Attesters, our platform allows users to bypass the outdated and lengthy loan set-up process with smart contracts. These smart contracts connect Bitcoin holders to the entire multi-chain, blockchain-based financial system being built. The variety of ways to leverage your Bitcoin on-chain is growing rapidly and being able to take a loan against it is just the beginning of an entire ecosystem of apps built using DLC.Link.
