4 Key Rules for Safer Crypto Lending
According to the FDIC, the national average interest rate on savings accounts currently stands at a pitiful 0.04% APY -- a pittance compared to the money your bank's earning by lending out your deposits. As a crypto lender, you get to enjoy interest rates of up to 15% APR. But before you ditch your savings account, you'll need to learn four fundamental rules to help minimize your risk and maximize your odds of a successful investment.
Crypto lending works similarly to a hard money loan: A borrower must first put up some at-risk collateral -- in this case, a portion of their crypto -- that you as the lender can seize if the borrower defaults on their payments. Usually, the collateral has to be over 100% of the amount they are borrowing. In turn, you know that if things get hairy, you can quickly recover your money by claiming the collateral.
Why would a borrower want to borrow funds, rather than spend the equivalent amount in what they already own? Well, suppose you hold a bunch of Bitcoin (CRYPTO: BTC), but the Bitcoin market is on the rise. You may not necessarily want to sell it, because you would miss out on potential gains. Instead, you can use your Bitcoin as collateral, borrow a stablecoin such as Tether (CRYPTO: USDT) -- with its value pegged to the U.S. dollar -- and still get liquidity. Once you pay off your loan, you get your Bitcoins back -- and if their value's risen in the interim, all the better.
Source Fool.com
