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Cryptocurrency is still on the rise as of this writing and with more and more people buying and selling crypto, a new financial strategy also came about called crypto-backed loans. In case you haven’t heard of crypto-backed loans, these are loans which enable the crypto investors to borrow money while maintaining their digital assets investments’ exposure in the market.
Crypto-backed loans are gaining popularity nowadays because of its advantage as to why it’s a great alternative to getting instant funds even if the investors don’t want to sell their digital assets.
If investors want a quick loan, they are required to put in their crypto as collateral, also known as a collateral token. This gives them an opportunity to get access to cash without selling their assets in the market. In addition, the interest rates may also vary in these crypto-backed loans and can be due to different factors like loan duration, loan amount, collateral token type, and more.
One vital factor in these crypto-backed loans is the liquidity of the asset. It’s safe to say that the higher the asset liquidity is, the lower the liquidity risk is as well. That being said, when you have a low liquidity risk, the lending process and terms are more favourable to the borrower.
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Those digital assets which have a range of mid to small caps will have a high liquidity risk and high volatility because the daily trading volume is relatively low as well. When you choose this type of collateral token, the lenders will most likely find it difficult to sell these tokens if in case the borrower defaults on his loan payments.
Consider Trading Volume
In general, you, as a borrower might have to consider a couple of things when choosing the right collateral token for your crypto quick loan. One factor is the trading volume. The trading volume is the total number of shares or contracts being traded for a specified security within a specified time period.
When a digital asset is traded actively day in and day out, you can say their trade volume is high. Otherwise, trade volume is low when it’s less actively traded. Try to pick a collateral token which has a high trade volume so lenders won’t have to worry about the difficulty in selling the tokens in case you flake on your loan.
Liquidity of the Digital Asset
Another factor to consider is the liquidity of the digital asset. Liquidity pertains to the level a particular asset can be quickly traded without altering its general price stability. Of course, the more liquid the asset is, the lower the liquidity risk. The two major aspects in order to measure liquidity are the volume and bid-ask spread. Some lenders only allow some big cryptocurrencies as collateral token as these types of digital assets are more liquid.
Check the Collateral Token’s Volatility
Also, you may want to check the collateral token’s volatility. The less volatile a digital asset is, the more favourable it will be for the borrowers. However, it is a known fact that cryptocurrencies, in general, are extremely capricious. More often than not, volatility of the collateral token might be at the bottom of the consideration list.
Check How Much Profit the Lender Can Get Out of Your Loan
Another factor that can be taken into consideration is how much profit the lender can get out of your loan. Business is business and as with any other conventional trading, a lucrative strategy is always the number one goal for lenders.
As a borrower, one thing you can also do to make sure your crypto quick loan gets approved is to make the loan request more appealing by taking future price fluctuations into account and putting a reasonable markup on the loan request. That way, lenders will be reeled into giving you the loan amount.
It’s also fair to protect the lender’s interests by implementing a collateral call. This means, if in case there is a drop in token value, let’s say the collateral value drops to 100 percent or less of the negotiated loan amount, the lenders will have the freedom to claim the tokens.
Now, people have more ways to leverage their digital assets if in case a financial emergency arises. Cryptocurrency is definitely bound to last a lifetime as long as the market conditions are good and on-going.
Author Bio: Sarah Brooks is an author and blogger, who enjoys sharing tips on personal finance, business and entrepreneurship. She is currently working for My Quick Loans, which offers fast loans online in the UK including Christmas loans, Payday loans, Late Night loans, Weekday loans, Student Short Term Payday loans and many more.