Crypto lending & crypto loans in P2P investing
Fintech companies have long sought to transform the financial industry with innovative new products.
However, these products are not for every investor — particularly those approaching retirement or seeking more stable income.
One such product is cryptocurrency loans and investing in them.
Cryptocurrencies have grown from a vision of a digitised currency to a multi-billion dollar asset class over the past few years, showing minor signs of slowing down.
Crypto enthusiasts believe that one-day digital currencies will replace fiat currency. Institutional investors invest in cryptocurrencies for their diversification and lower transaction costs than precious metals like gold.
Crypto lending has gained massive popularity over the past few months, with even Tesla buying billions of Bitcoins . This surge has increased other investors who wish to earn money by investing in cryptocurrency assets or investing in crypto-backed loans.
What is Crypto Lending?
Crypto lending is very similar to P2P lending or crowdfunding. It is an alternative investment where investors lend cryptocurrency to borrowers in exchange for regular interest payments.
The borrower then deposits cryptocurrency related-assets as collateral to secure an investor’s investment. Crypto lending is more accurately known as DeFi Lending and part of the Decentralised Finance (DeFi) system, with the aim of removing middle third parties from financial transactions.
Crypto lending platforms connect investors with borrowers and businesses, much like any other P2P lending platform. These decentralised lending platforms provide loans; some of the most known are , and .
Is crypto lending safe?
No investment is 100% safe. Many crypto lending platforms convince investors that they can’t lose or that cryptocurrencies will always increase in time, much like the housing market.
Furthermore, there’s a lack of transparency regarding the information that crypto lending platforms share. Several sites do not even list their corporate address or licencing details, which for all investors know could be falsified.
Naturally, this does not mean that investors should avoid crypto lending.
With crypto lending, securing investments is achieved by over collateralised assets, which means that the collateral is worth more than the borrower’s amount.
If the borrower defaults on their debt, the loan is repaid with the borrower’s assets.
There should always be enough collateral to cover the outstanding debt. If the collateral drops value, the borrower will need to repay their debt or increase the number of crypto-assets to maintain the loan to value ratio given by the P2P crypto platform.
The loan to value ratio should be adequate protection against defaulting borrowers as an investors investment is secured by collateral that can be liquidated.
Risk levels compared with regular P2P investing
One risk that investors should note when investing in crypto loans is that a crypto lending platform could default and vanish with your money.
The same scams occurred when companies launched the first P2P investment platforms.
P2P investing platforms have come a long way to demonstrate their liquidity and business models.
However, the leading crypto lending platforms aren’t addressing even simple due diligence questions.
Suppose you want to find out who’s behind the crypto lending platform and what country jurisdiction it operates. In that case, you will need to dig deep.
Some of the platforms won’t provide any clarification at all.
Crypto lending platforms often choose countries with more crypto-friendly regulation (notably the Cayman Islands and Estonia), allowing some to operate more flexibly.
Fortunately, most investors see through this — missing necessary company information and a meaningful page won’t cut it in 2021.
We have seen significant improvements regarding transparency within the P2P investing industry in the last few months.
Legitimate P2P investing platforms, P2P marketplaces, and lenders will publish statistics and get audited financial reports.
Yet when it comes to crypto lending platforms, this information is lacking right now.
Crypto loans are a little unknown
Cryptocurrency is not an easy thing.
We always suggest not investing in something you don’t know as it is dangerous.
Paraphrasing the last sentence — that is gambling. And as you are probably now in gambling, odds in the long term are against you, so you will probably lose your money.
Before investing in virtual currency, you must know all the principles of it. For example — how is it made, who made it, how much of them are in the market etc. It is a bit complicated, and it takes time.
We would say that investing in cryptocurrency is much riskier than P2P lending investments.
These investments are usually backed with loan objects or other companies that will buy back the bad loans from you.
Where to invest mainly depends on your risk levels and time. The crypto thing is tough to understand at the moment.
No one knows how this will end.
Everyone is talking about it, but there are only a few experts in the industry. Some people say it is a bubble; some — the next big thing.
Suppose you have time and are ready to risk. In that case, you can invest in cryptocurrencies to potentially get more significant returns. However, if you want to safeguard more of your capital for lesser returns, stick to peer-to-peer investing.
Or there is always a middle road — diversify your investment portfolio. Put part of your money in P2P lending and other elements in cryptocurrencies. Balance the % by your risk tolerance.
Crypto lending vs traditional P2P investing
Benefits of crypto loans
- Cryptocurrencies are relatively uncorrelated with traditional assets. They increase diversification and improve overall risk-diverse returns in a portfolio. There are hundreds of ‘ ‘ that can be used to spread the risk of volatility of the leading coins of Bitcoin and Ethereum.
- Cryptocurrency transaction costs are much lower than precious metals, meaning less is lost to third parties. These costs are likely to fall as blockchain technology becomes more efficient.
Risks of crypto loans
- Cryptocurrencies are more volatile, meaning they are not suitable for risk-averse investors.
- Cryptocurrencies do not generate cash flow. Being digital, they are not backed up from any physical assets like fiat currency. Meaning they could lose all their value.
- It is still unknown precisely what role cryptocurrency and blockchain will play in the future as relatively new assets. Despite Tesla and hedge funds using cryptocurrency as an investment vehicle, the US Treasury and most governments do not see an exact role for decentralised finance and view it as highly speculative.
- Whilst cryptocurrency is safer from the risk of theft from others, its decentralisation means that if passwords and access to wallets are lost, the money is not retainable. Millions of dollars of cryptocurrency have been (and remains) lost this way.
Benefits of P2P investing
- P2P investing returns yield more than dividend stocks and bonds since it removes third parties like banks so that individuals receive better returns and lower costs.
- P2P investing offers different options from businesses, individuals, loan originators, thus appealing to more risk-averse investors.
- P2P investing platforms offer Buy Back guarantees should loans default, requiring the loan originator to buy back the loan, thus reducing risk.
Risks of P2P investing
- Due diligence is required to ensure that investors build a portfolio that reflects their risk tolerance and investment goals. Even using Auto Invest features require initially setting up investment foals.
- The portfolio management process can consume an investors time more than passive investments like managed stocks by a hedge fund manager.
- Although safer than cryptocurrency, P2P investing is not risk-free as borrowers can still default on their loans.
Invest in P2P with what you know
Fintech companies continue to develop newer ways of investing, and crypto loans and crypto lending are such products.
Despite the headlines of Tesla and huge numbers being quoted, cryptocurrency investing is not perfect for every investor, especially if they are risk-averse.
It would be best to understand the risks involved before investing in these crypto lending platforms.
Since many investors are not yet familiar with crypto lending, the risks are somewhat more significant due to it being unknown. Much like P2P investing was years ago, familiarity with cryptocurrencies will naturally increase.
At present, being a new investment vehicle means there are risks of being targeted by scams. As cryptocurrencies are often misunderstood and unregulated, unsavoury characters are attracted to these new investments to profit from unsuspecting victims.
Investors should approach any new investment with caution. New alternatives can look very appealing.
As with investing, you should never invest all or a large percentage of your portfolio in one investment. It’s still best to combine alternative P2P investments with traditional stock and bond markets that have helped investors make money for decades.