Cryptocurrency lending is relatively new. There are different ways of doing so but the risks are rising. Therefore, you must learn the fundamental rules for safer crypto lending that will help you minimize risk and maximize the success of your investment.
4 Important Rules for Safer Crypto Lending
Through crypto lending, lenders can benefit from their crypto assets. This is possible without them selling off large portions of their crypto holdings. However, the risk involved in loans has necessitated the need for safer practice. Here are 4 key rules for safer crypto lending:
1. Monitor local crypto regulations
Local crypto regulation is constantly changing, you should always monitor them. Regulators have recently started cracking down on DeFi lending platforms. This is because of the perceived concern that DeFi lending constitutes an offering of securities that is not licensed.
Decentralized exchange platforms such as Coinbase were even forced to shut down their cryptocurrency lending activity as a result of SEC securities law violations. It is expected that the big wigs in the crypto landscape accept some regulations on their terms. This will be to avoid regulations being forced upon them by the government.
2. Only make use of well-established lending platforms
You should only deal with legitimate platforms when performing transactions that have to deal with your digital assets. Legitimate crypto platforms work in a way that is similar to traditional banks. They work in hand with specialized providers to ensure that your crypto is stored safely.
To help you get a legitimate lending platform, search for margin lending funds and centralized platforms. Do this as opposed to DeFi. Check and see if and how your assets are protected in case of theft or other issues.
For instance, users with assets on the Celsius platform are protected against loss through Primetrust and Fireblocks. Both Primetrust and Fireblocks provide insurance for any digital asset kept on the Celsius wallet and platform. However, the insurance does not cover any loss incurred with the crypto you borrow.
3. Use stablecoins or fiat currency
Altcoins like Cardano and Ethereum are volatile. You will not be able to limit your losses and sell them if they drop while you are lending them out. This is because they are tied to the borrower. By contrast, significant gains could be seen from an altcoin you are currently lending. This is not great for the lender but great for the borrower. It is the same with the interest.
However, stablecoins are backed either by gold or the US dollar. They are always in a better position to withstand volatility regardless of what happens in the crypto industry. Binance USD, USD Coin, and Tether are the most well-known stablecoins.
4. Avoid DeFi platforms if you are not an experienced crypto trader
The government will restore all that you lost should your bank fail. Unfortunately for DeFi platforms, there is no 3rd party to hold accountable should all your assets be lost unexpectedly. Users can borrow or lend digital currency either through Centralized Finance (CeFi) networks like Celsius or through DeFi platforms like Aave or Compound.
Transactions are tracked with a blockchain on all DeFi lending services; no central authority or traditional bank is involved whatsoever. Moreover, DeFi protocols are subject to hackers and technical errors.
Even though there are risks involved in crypto lending, it still has a great ROI potential. You can still choose to lend your digital assets even as regulations on cryptocurrency keep changing. Lending safely will ensure that you make good returns on your investment.
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