Cryptocurrencies have become a major part of modern investing. Like traditional assets, crypto can be lent, borrowed, and used as security for loans.
Crypto lending offers users attractive interest rates, quick access to loans and borrowing options, and a way to earn passive income or unlock cash without selling their digital assets.
But after several high-profile liquidity problems that caused major platforms like Celsius and BlockFi to collapse, many investors are now more cautious about lending their crypto.
Related Topic: How to Refinance Your Celsius Loan
This caution is understandable—and even wise. There are real concerns about how safe crypto lending really is. However, some good might come from these events.
Regulatory agencies have filed lawsuits against Celsius and its former CEO, Alex Mashinsky, which could lead to stronger protections for users in the long run. Even if these actions don’t result in immediate changes, there are already safer, lower-risk crypto lending choices you can explore.
In this article, we’ll explain the main risks of crypto lending and highlight the safest options for people who want to earn income or access loans using their crypto.
What Is Crypto Lending?
Crypto lending is a way for you to earn interest on your crypto without selling it or being affected by daily market price changes. Instead of letting your crypto sit idle in a wallet, you can lend it out through a lending platform.
In return, you earn interest from borrowers who need access to those assets and are willing to pay for them.
Crypto-backed loans are one part of crypto lending. These allow you to borrow money or stablecoins by locking up your crypto as collateral. This means you can keep your crypto investment and still get cash when you need it.
You deposit your crypto with a lending platform, and based on its value, you receive a loan. Once you pay back the loan and interest, you get your crypto back.
If you want to learn the full process of borrowing against crypto, check out our complete guide, “How to Borrow Against Crypto – Decoding Crypto Loans.”
How Does Crypto Lending Work?
To lend crypto, you transfer your assets to a crypto lending platform. In return, you receive regular interest payments—similar to how a savings account pays interest in a bank.
Here’s an example: You decide to lend 2 BTC (Bitcoin) to a platform for 90 days at a 6% interest rate. Your BTC is placed in a savings account. The platform lends your crypto to an institutional borrower who needs it for a short-term investment, with their own collateral.
After 90 days, the borrower repays your 2 BTC along with the agreed 6% interest. This way, you earn a return while still keeping ownership of your BTC.
Crypto-backed loans work in a similar fashion. You send your crypto to a platform, and in return, you receive a loan—either in fiat (like USD) or a stablecoin. The amount you can borrow depends on the value of your crypto collateral.
You can use the loan for anything you want. When you repay the loan and interest, your crypto is returned. If you don’t repay, the platform may sell your crypto to recover the loan.
Want a deeper understanding? Read our full blog guide: “Ultimate Guide to Crypto Lending.”
Is Crypto Lending Safe?
The safety of crypto lending depends on many factors, including the platform you choose and the type of lending product you use.
Some platforms offer high interest rates—but these usually come with higher risks. Peer-to-peer (P2P) lending, where users lend directly to other individuals, carries more risk because there’s less oversight, and borrowers may default.
On the other hand, crypto savings accounts generally offer lower interest rates but are considered more secure and stable.
Just like with traditional lending, no investment is completely risk-free—even the safest loans carry some risk.
The 4 Biggest Risks in Crypto Lending
Before you start lending crypto, it’s important to understand the major risks involved. Below are the key issues you should be aware of:
1. Unclear Legal Regulations
The rules around cryptocurrencies and lending are still being developed in most parts of the world. This lack of clear legal guidelines can be confusing for lenders and borrowers alike. Some countries have defined rules for crypto, but many still haven’t.
Most crypto lending platforms don’t face the same regulations as traditional banks. However, recent collapses like that of FTX have pushed regulators in North America to act.
More regulatory enforcement is now happening, and some companies—like Coinbase and Ledn—are seeking approval in regions with more clearly defined crypto rules.
2. Platform Bankruptcy (Insolvency Risk)
When you lend your crypto to a platform, you’re placing your trust in that company. If the platform faces financial problems or shuts down, you could lose some or all of your crypto.
In the past year alone, several major platforms—including FTX, Three Arrows Capital, Voyager, and Celsius—have filed for bankruptcy. This has raised alarm among crypto investors.
To reduce this risk, only use platforms that are financially stable, transparent, and have strong risk management. Ledn, for example, has taken extra steps by protecting user funds in their Growth Accounts, separating them from other company operations.
Look for platforms that provide Proof-of-Reserves audits. These are independent checks by certified accountants that show whether a platform has enough assets to cover user balances.
They also show how much the platform owes versus how much it actually holds. This adds transparency and helps prevent liquidity issues during mass withdrawals.
3. Hidden or Unclear Fees
Some platforms have hidden fees that aren’t obvious until after you’ve started using the service. These fees can take away from your earnings. Always review the fee structure carefully before lending your crypto.
4. Risks in DeFi (Decentralized Finance)
While DeFi has become very popular, it also comes with specific risks. One of the most common scams in DeFi is called a rug pull. This is when a group creates a new token, hypes it up to increase its value, and then suddenly disappears with the funds—leaving investors with nothing.
Related Read: CeFi vs DeFi – What You Need to Know
Other Risks:
- Cyber Attacks: Crypto platforms are prime targets for hackers. If a platform is breached, your funds may be lost with no guarantee of recovery.
- Price Volatility: Crypto values can change quickly. If you borrow using crypto as collateral and its value drops, you might need to add more collateral or risk liquidation. Using more stable assets like Bitcoin or Ethereum can reduce this risk.
Benefits of Crypto Lending
Despite the risks, crypto lending also comes with many advantages—especially if you choose reliable platforms and top cryptocurrencies like Bitcoin or Ethereum.
1. Earn Passive Income
You can earn interest just by lending your crypto. Unlike traditional banks, crypto interest rates are usually much higher.
2. Attractive Interest Rates
Interest rates in crypto lending are generally better than what traditional banks offer. For example, banks in the U.S. currently offer an average of 0.42% on savings accounts. In contrast, Ledn offers up to 9% APY on its Growth Accounts.
If you’re borrowing, crypto loans are also much cheaper than payday loans or credit card debt.
Want more info? Read: “Best Bitcoin Loan Rates in 2023.”
3. Flexible Terms
You can choose how long to lend—short-term or long-term. If you’re borrowing, repayment terms can be customized to suit your financial situation.
4. Low Entry Barriers
Most platforms let you start lending with small amounts of crypto.
5. More Privacy
Crypto lending doesn’t require you to share a lot of personal information. Unlike banks, which require credit checks, crypto platforms typically just need your crypto as collateral.
6. No Credit Checks
Since crypto loans are secured with collateral, they don’t require traditional credit checks, making them more accessible.
7. Global Access
Anyone around the world can lend or borrow through crypto platforms. Even people without access to traditional banking can participate.
What’s the Safest Way to Lend Crypto?
Lending for Passive Income (Savings Accounts)
Crypto savings accounts are among the safest ways to earn interest on your crypto. You deposit your assets, and the platform lends them out and shares the interest with you.
The best platforms are user-friendly, transparent, and offer easy deposits and withdrawals. They also give you tools to manage your account and track your earnings.
Savings accounts help reduce the major risks mentioned earlier and offer more stability. For example, Ledn offers BTC and USDC savings accounts with clear fees and up to 10% APY.
Lending for Loans (Using Crypto as Collateral)
If you want to borrow against your crypto, make sure you choose a platform that is financially secure and transparent. Look for platforms with Proof-of-Reserves audits to ensure your assets are well-managed.
Final Thoughts
Whether your goal is to earn passive income or take out a crypto-backed loan, crypto lending has a lot to offer. But it’s important to understand and manage the risks. Make sure to research each platform, understand your risk tolerance, and stay up to date with the latest crypto trends.
To learn more, explore our blog series on crypto lending—or start earning interest today with a Ledn Growth Account.
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