Cryptocurrency-Backed Loans Remain Popular Among Investors Despite Risks

A new loan market has emerged in which borrowers collect cash loans while staking their cryptocurrency as collateral, says an April 2, 2019 report from Bloomberg.

Blockchain Borrowing

Blockchain has many uses when it comes to the loaning of money. It has been deployed it help manage the affairs of credit unions and loan platforms such as SoFi have teamed up with crypto platforms.

Now, cryptocurrency is getting its chance to shine as a report from Bloomberg on April 2, 2019, states that there has been an increase in crypto lenders in recent times. These lenders essentially give cash loans to individuals with the borrower handing over their cryptocurrency as collateral.

According to the report, there are a number of factors that have caused this practice to thrive and it shows little sign of stopping.

A New Market

One of the reasons why such a loan arrangement has become so favored as of late is due to the tax-free nature of the transaction.

Former Wall Street trader Edgar Fernandez was noted to have taken out a loan of $100,000 using his bitcoin as collateral. In a normal situation, he would have had to pay taxes, but since cryptocurrency is classified as an asset under US tax laws, he isn’t being taxed by borrowing against them.

This single fact has helped grow an entire sub-market that specializes in giving out loans in exchange for crypto as collateral.

Naturally, this isn’t a perfect system and there are some setbacks, with the most obvious being the volatility of the crypto market and thus, the fluctuating value of the collateral. In the case of a crypto price crash, the borrower could be required to buy more cryptocurrency to cover the difference, even as the original collateral is sold off to pay back the loan.

Another thing to keep in mind is the fact that the borrower’s cryptocurrency is at risk of being stolen while in the custody of the lender. While in the custody of the lender, the crypto could even be sold off and a tax bill could be incurred from the Internal Revenue Service (IRS) for the original borrower.

Still, the practice has continued to thrive, with Genesis Capital, a cryptocurrencies lender in Jersey City, N.J., an affiliate of Genesis Trading, saying that they lent out $1.1 billion in cash loans in Exchange for crypto collateral in 2018 alone.