Cryptocurrency loans have created new opportunities for crypto holders to access liquidity without selling their physical properties. In Australia, particularly, the demand for such loans is rising as more investors are finding ways to leverage their digital assets. However, this path to financial freedom requires careful consideration of risks and other factors.
Here, we’ll discuss how to protect yourself while optimizing your crypto holdings. Understanding these essential elements can mean the difference between a successful borrowing experience and experiencing potential financial setbacks.
The Risks of Crypto Lending
Unlike traditional personal loans that rely on credit checks and credit scores, crypto lending platforms use your digital assets, mainly your cryptocurrency, as collateral.
No wonder estimates from the Australian Taxation Office (ATO) reveal that more than 600,000 taxpayers have invested in virtual currencies as of October 2023. A cryptocurrency exchange platform suggests one in four Australians possesses these digital assets. This figure supports a more recent finding stating that over one million taxpayers have “interacted” with cryptocurrencies since 2018. (1) (2)
But like other types of lending, this approach carries inherent risks. Even experienced borrowers need to stay vigilant about these potential downsides:
- Liquidation risk: Automatic liquidation can occur when the value of your collateral drops below the platform’s required threshold. If the crypto market experiences a sharp downturn, the lender could sell your deposited assets for less than its value.
- Market volatility: Cryptocurrency prices can swing dramatically within hours. A sudden drop in your collateral value could force you to either add more of your crypto assets or face liquidation. This becomes concerning when you’re lending against more volatile altcoins rather than established currencies.
- Interest rate fluctuations: Unlike traditional banking, where rates change gradually, crypto lending platforms can adjust their rates rapidly in response to market conditions. Variable rate loans, the overall cost of borrowing, and your loan refinancing options can be affected as a result.
Understanding these associated risks helps you maintain a profitable borrowing position. Transacting with transparent platforms and developing risk mitigation strategies can help you manage these changes more effectively.
Choosing the Right Platform
Smart risk management starts with choosing the right crypto lending platform. Look for one that offers transparent loan data and customer support. More importantly, evaluate the creditor’s internal policies and features that protect borrowers from risks.
Security and Transparency
Crypto loan platforms use smart contracts and refine their security measures constantly to keep your collateral safe and secure. But most of them rehypothecate or reuse a lender’s collateral for additional lending or investment purposes. Doing so exposes your assets to increased risk.
Crypto loans by Vield sets itself apart by maintaining a strict policy against rehypothecating borrowers’ assets. Under the leadership of Chief Financial Officer (CFO) Sam Teoh, who previously served as Binance Australia’s CFO, Vield ensures that your crypto remains locked until you’re able to repay the loan.
Additionally, the platform lets you trace your assets at any time—ensuring that they’re intact and fully accounted for. Early this year, the company loaned out AUD$10 million to 150 crypto users in Australia. (3)
Platform Features
Your chosen platform should provide intuitive access to all essential loan management tools. You should be able to access critical information like collateral ratios, liquidation prices, and interest rates. It also helps to evaluate the platform’s repayment options. Flexible repayment terms can be invaluable when managing your loan strategy.
Track Record
Beyond these foundational elements, consider the crypto lender’s track record in the market. Established platforms with a history of reliable service often provide more stable and secure borrowing environments. Take time to read user reviews, examine the lender’s regulatory compliance, and verify their standing within the crypto community.
You should also pay extra attention to the responsiveness and knowledge of customer support teams. Quick access to expert assistance can be crucial during market volatility.
Look beyond attractive interest rates. The most important factor is finding a trustworthy crypto lender that prioritizes the security of your crypto assets and maintains transparent operations throughout the lending process. A reliable platform imposes a transparent fee structure, with all costs clearly documented and easily accessible. Before you commit to a loan, double-check your payout address and verify all smart contract interactions.
Regular Monitoring
Being vigilant of your crypto loan means tracking collateral value fluctuations in real-time. Falling below these levels could trigger the automatic liquidation of your collateral. Adopt a proactive approach by setting automated alerts. Your chosen platform should notify you when values approach critical thresholds.
It also pays to track interest rate changes. Even small adjustments can significantly impact your long-term costs, especially with larger loan amounts. A good rule of thumb is to establish a routine to review your loans periodically. For example, conduct weekly reviews of your loan-to-value ratio and monthly assessments of your overall loan performance.
Risk Mitigation
Much like investing in crypto, you can diversify your collateral whenever possible. Spread your loan across different cryptocurrencies to buffer against dramatic price swings in a single asset. You can combine stable coins with major cryptocurrencies for a more balanced collateral portfolio. Aim to keep a portion of your loan value readily accessible to adjust your collateral if market conditions deteriorate quickly. Consider credit lines that you can tap to protect your collateral from liquidation.
Regulatory policies on crypto continue to evolve worldwide. These revisions can affect your loan terms and collateral requirements. Your chosen platform’s operations, tax obligations, and access to lending services might also change. Stay actively informed about platform updates and changes in lending policies to adopt a healthy loan position.
Contingency Planning
In addition to risk mitigation, you must also know how to handle unexpected market movements or technical issues. Start by establishing multiple backup funding sources. Apart from keeping stable coins across different exchanges, maintain fiat reserves in traditional bank accounts.
Diversify your withdrawal options by maintaining verified accounts on the platforms you use. You must link your bank accounts properly. Redundancy becomes invaluable when you need quick access to funds or if the withdrawal method experiences delays.
You also need to understand the platform’s liquidation process and familiarize yourself with its emergency contact protocols. Engage with customer support during normal operations, keep your account documentation current, and maintain clear communication channels.
Final Thoughts
Choosing reliable crypto lending platforms is crucial. However, at the end of the day, it’s your responsibility as a borrower to manage your loan effectively and protect your crypto assets. To minimize potential downsides, always stay vigilant and informed about the market conditions that affect your collateral value and interest rates. More importantly, develop risk mitigation and contingency plans to make the most out of your borrowed funds.
Citations
- “Address to the Australian Financial Review Crypto Summit 2023, Sydney”, Source: https://ministers.treasury.gov.au/ministers/stephen-jones-2022/speeches/address-australian-financial-review-crypto-summit-2023-sydney
- “What Is Cryptocurrency?” Source: https://www.forbes.com/advisor/au/investing/cryptocurrency/
- “How Australians are unlocking their crypto riches”, Source: https://www.afr.com/markets/currencies/how-australians-are-unlocking-their-crypto-riches-20240422-p5flps
Read Also: What Are the Different Types of Crypto?
Disclaimer: The information provided on AlexaBlockchain is for informational purposes only and does not constitute financial advice. Cryptocurrency investments, including but not limited to ICOs, IDOs, presales, and other token offerings, carry significant risk. You are solely responsible for conducting thorough research (DYOR) and exercising due diligence before making any financial commitments. It is strongly recommended that you seek professional financial advice before making investment decisions. Read complete disclaimer here.
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