Bitcoin is increasingly being recognized as a reliable store of value, and now it’s even being used to secure personal loans. According to a recent Bloomberg report, several startup lenders have started accepting cryptocurrencies like Bitcoin and Ethereum as collateral.
Companies such as Salt Lending and CoinLoan are leading this trend by offering loans in regular fiat currencies—like U.S. dollars or euros—backed by crypto assets. Another player in this growing market, London-based Nebeus, says it has already facilitated over 1,000 loans using Bitcoin and Ether as collateral.
The rising popularity of using Bitcoin and other digital currencies for collateral is largely driven by their massive increase in value. Bitcoin alone has soared more than 1,600% this year.
This surge has not only boosted Bitcoin’s valuation but has also lifted the prices of many other cryptocurrencies, pushing the entire crypto market to new heights. (Also read: 6 Biggest Banks Offering Personal Loans.)
At Salt Lending, borrowers can get loans without undergoing credit checks or dealing with loads of paperwork. However, the loans come at a significant cost. For instance, to borrow $100,000 in cash, a borrower would need to provide $200,000 worth of Bitcoin as collateral.
The interest rates range from 12% to 20%. In comparison, unsecured loans of the same amount from traditional banks like Wells Fargo typically have interest rates between 7% and 20%.
Given Bitcoin’s high volatility, there’s concern about what might happen if its price drops drastically. Salt Lending hasn’t clearly explained how they plan to handle such situations. (See also: 8 Possible Risks From Unsecured Loans.)
According to Bloomberg, these loans may be especially useful for cryptocurrency miners who need to cover hefty electricity bills from operating their high-powered ASIC machines.
Interestingly, Salt Lending is also in discussions with a traditional financial institution to introduce a similar crypto-backed loan product, which could launch within weeks. This move would bring crypto-collateralized loans closer to the mainstream financial sector.
CoinLoan, on the other hand, operates on a peer-to-peer lending model. This means Bitcoin holders can use their cryptocurrency to borrow cash from individuals who are willing to lend money.
CoinLoan makes money by charging fees on these transactions. Additionally, the platform plans to launch its own token—CLT—to further support its ecosystem.
Salt Lending also has its own digital currency called SALT, which is used for internal transactions on its platform.
Borrowers can use SALT tokens to pay interest on their loans. At 5:19 AM UTC, the SALT token had a market cap of $4.2 billion and was trading for $8.41 on CoinMarketCap.com. However, within Salt’s own platform, the token is valued at $25.
This price discrepancy has sparked discussions on Reddit, where users are already exploring ways to take advantage of the difference—possibly by buying cheaper tokens from the open market and using them on the Salt platform to reduce loan interest. (See also: Price Difference in Bitcoin Futures and Spot Markets Presents Arbitrage Opportunity.)
This development marks a new chapter in the evolving role of cryptocurrencies. Not only are they now investment vehicles and mediums of exchange, but they are also becoming tools to access liquidity without the need to sell.
While there are still many risks and uncertainties—especially related to price fluctuations—crypto-backed lending is proving to be a creative and increasingly popular use case for digital assets.
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