Crypto Loans Explained: A Complete Guide for Traders

Introduction

Since the very advent of human civilization, businesses have exchanged loans. These loans facilitate the receiver as well as the lender. The lender accrues interest, and the receiver manages the expenses, which would have been difficult had they not borrowed. The amount of interest is usually set by the lender, so it can sometimes be stifling for the borrower. Crypto traders can borrow from the exchanges they use. Although leveraging is also a form of borrowing, this article focuses exclusively on the special cases that involve the term “loan” specifically.

Collateral Against Crypto Loans

When you get loans from banks, you guarantee the return of the borrowed amount by providing some collateral. This collateral can be the papers of your property, gold, any other asset, or a co-signer who is a trustworthy person for the bank. In case of crypto loans, you can only put your crypto as the collateral. Even if you provide your KYC to centralized exchanges and even if they comply with the local rules and regulations, you cannot ask them to consider any asset as collateral other than your crypto funds.

Types of Loans for Cryptocurrency Traders

You can avail the loans on many platforms on different terms and conditions. There are a variety of options available as far as the types of loans are concerned. Flexible loans, fixed-rate loans and VIP or Institutional loans are a few major types offered by a few notable exchanges.

Flexible Loan

Binance, crypto.com and YouHolder offer flexible loans but Coinbase does not. The term itself is suggestive in this regard that there is no deadline for you to return the loan. Flexible loans let you unlock loans in the form of stablecoins without selling your crypto assets. You use your tokens as collateral while keeping the loan open until you choose to close it. Many top market-cap coins can be used as collateral. Interest generally accumulates on hourly or daily basis, and borrowers have the option to make partial or full repayments at any time.

This arrangement provides immediate liquidity for trading or covering expenses without resulting in a taxable transaction. The collateral you lock remains at risk if its market value falls, so the loan platform will monitor the loan-to-value ratio and may require you to add more collateral or repay part of the debt to avoid forced liquidation.

This type of borrowing is popular not only with traders who want quick, short-term funding, but also with long-term holders who wish to preserve market exposure. The main advantages are speed and flexibility, while the main drawbacks are market risk to the collateral and ongoing interest costs that can add up if the loan is kept for a long time. You must check the exact terms and conditions on the platform you use, monitor your loan to value closely, and have a plan to add collateral or repay if markets move against your position.

Fixed-Rate Loan

Binance, Figure, Ledn, Nexo and YouHodler offer fixed-rate loan options. A fixed-rate loan lets a borrower lock in an interest rate for a defined term, so the cost of borrowing does not change during that period. When you open a fixed-rate loan, you select the amount, the collateral and the term, and the platform displays the fixed APR that will apply until maturity.

The main advantage of a fixed-rate loan is predictable borrowing cost, which helps budget-tight traders and hedgers. Main trade-off is that exchanges can sometimes demand over collateralization. You must ensure that your collateral remains above maintenance thresholds. Otherwise, the platform can liquidate your assets to cover the debt.

A few exchanges let you extend a fixed-rate loan when it ends or switch it into a flexible loan, but the costs and rules are not the same everywhere, so you need to read them carefully. Fixed-rate loans are helpful when you think interest rates will go up, but they may turn out to be costly if market rates go down after you have locked your loan.

VIP/Institutional Loans

Some exchanges like Binance, Coinbase Prime, Kraken Prime, Figure, Arch Lending, and Nexo offer special loans for big investors such as professional traders, hedge funds, and large businesses. These loans are designed to fit the needs of each client and are usually set up through trusted financial partners. The process includes strict checks to make sure everything follows the rules. Big investors can borrow more money and get flexible terms, like using their whole investment portfolio as security, choosing different currencies to repay the loan, and discussing interest rates. This helps them get cash without having to sell their main investments.

Institutional loans have some special features that make them different from regular loans for individual traders. Big clients can delay liquidation if markets fall, use collateral from several accounts together, and agree on special rules for custody and margin. They can also renew loans or share credit with other large partners. These loans are useful for professional activities such as market making, arbitrage, covering short positions, and managing company funds. However, they also carry risks like problems with the other party, legal issues, and complex operations. Therefore, institutions need to check everything carefully and use strong systems to protect their assets.

How to Apply for a Loan

To apply for a crypto loan, you generally follow the same simple steps across most centralized and decentralized platforms. First, create an account and complete identity verification if required by the platform. Next deposit the crypto you will use as collateral or connect your wallet on DeFi services. Then choose the loan product and enter the amount and terms while carefully reading the initial loan to value ratio, interest rate and liquidation threshold. Confirm the loan to lock your collateral and receive the funds in your account or wallet. Finally monitor your collateral value and the loan to value closely and repay or add collateral as needed to avoid liquidation.

Conclusion

The long and short of the discussion is that apart from your own assets, you can also acquire loans in crypto trading. Just like traditional banks, exchanges keep your crypto assets as collateral. You can benefit from the loans if markets go in uptrend, but also lose money if bearish trends set in. Most of the reputable exchanges offer flexible loans and fixed-rate loans. VIP loans are exclusive products for institutions and big players. Whenever you avail yourself of any loan, you must keep an eye on the liquidation threshold so that you may not lose your collateral.