Borrowing against cryptocurrency has become a popular topic, despite the risks. But is a crypto loan right for you?
Like a house, car or other investment, your cryptocurrency can serve as collateral for crypto loans, which are loans that can have low interest rates, same-day funding and no credit check.“That is going to be the main disadvantage of crypto,” says Travis Gatzemeier, a certified financial planner and founder of Kinetix Financial Planning near Dallas. “It’s not a normal, stable asset that you’re using to borrow.
Bitcoin is a cryptocurrency, or a digital form of money. It might seem complex — and depending on how you use it, it can be — but it’s essentially digital tokens as opposed to physical money. It can be exchanged for goods and services on the blockchain, which is a digital ledger that keeps track of every bitcoin transaction.
In this case, cryptocurrency is the asset offered to a lender in exchange for cash that you’ll pay back in installments. If you fail to repay the loan, the lender will liquidate or cash out the cryptocurrency. Why borrow against crypto? A crypto loan may make sense if someone holds a substantial amount of crypto and wants to liquidate it without having to sell and possibly pay taxes on it, says Gatzemeier.
The unsteady value of crypto can lead to a margin call, where the borrower must put up more crypto to maintain the value of the initial pledge. In addition to unstable pricing, crypto loans are also not federally insured, says Gatzemeier. If you lose your funds in a security breach, for example, compensation isn’t guaranteed.Alternatives to borrowing against your crypto If you have equity in your home: With a home equity line of credit, you can potentially borrow up to 85% of your home’s value. Be careful, though, as you can lose your home if you don’t repay.
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