Suppose you need money but don't want to sell your Bitcoin. There are service providers who will lend you money in return for Bitcoin or other crypto deposits. Conversely, you can also lend out crypto at those platforms and get interest on it.

How do you lend money against your crypto? Most of the lending in crypto works - funnily enough - like an old-fashioned pawn shop. You can borrow money there "in exchange for your gold chain". Only when you have repaid the amount, will you get the gold chain back. So in this example, that gold chain would be your Bitcoin, or other crypto.

How does it work: borrowing with crypto as collateral?

After you create an account, most services give you some kind of calculator in which you fill in:

• The amount you want to borrow and in what currency you want to receive it (euros or crypto)
• The collateral you want to deposit, for example BTC or ETH
• The desired loan-to-value: the ratio of the loan amount to the collateral
• The term

Depending on how you choose these variables, the interest rate you pay will differ.

What is loan-to-value?
A very important term to keep in mind when doing your calculations is loan-to-value (LTV): this says something about the amount of collateral you're putting up. Most crypto backed loans are "overcollateralized". This means that you have to put down more collateral than you borrow. Suppose you choose a loan-to-value of 50%. That means that to borrow 1000 euros, you have to deposit 2000 euros of crypto. Do you opt for an LTV of 25%? Then in this example you put in 4000 euros of crypto to borrow 1000 euros. The lower the LTV, the less interest you have to pay.

What are the benefits of crypto-backed loans?
The big advantages of crypto-backed loans are the speed and flexibility they offer. You can take out a loan quickly, with a lot of choice in terms of repayment terms and LTV/interest rate.

One reason to take out such a loan is that you want some extra euros to pay for things or to invest, without selling your crypto. That investment can also be in ... crypto. In fact, some people are so bullish that they use their Bitcoin as collateral to buy more Bitcoin. But beware ... there are risks involved here - see below.

What are the risks?

If you choose a high LTV, you run more risk of getting a margin call that you need to replenish more collateral. How can this happen? If the price of the currency you're using as collateral drops sharply, your loan is no longer adequately covered. You will then have to make an additional payment. In a severe crash, it is conceivable that you are too late to replenish your collateral - or perhaps you do not have this collateral. In that case, your collateral will be sold and you will lose it. Therefore, it is important to think carefully about the following:

• Choose an LTV that is not too high
• Keep some money at hand in case the price falls hard and you have to pay extra.

Not your keys...

Another risk you inevitably run when you deposit your crypto is that you no longer have control over your own keys. Not your keys, not your coins. You trust the service that holds your crypto to do so responsibly. The good news is that centralized platforms have not been hacked in recent years, if at all. Other good news is that some are insured. But, there are some other risks of not having control over your own keys. For example, if the platform chooses to halt withdrawals. Definitely, something to check when taking out a loan.

Lending out your crypto

The reverse of the above is of course also possible, namely lending out your crypto. As a first example, this is possible in the world of Decentralized Finance. We won't go deep into that now: this world is still very experimental and risky (although for example Aave, Maker and Compound are reputable services).

Second, lending can usually be done at the same counterparties where you can borrow money (see the list below). How does it work?

• You create an account.
• You deposit the share of your crypto you want to lend out.
• You get a periodic interest payment, for example once a week. The interest is usually in the crypto currency itself, so not in euros.
• You can withdraw the loaned amount whenever you want.

Important to keep in mind: interest rates fluctuate a lot. They are usually higher in a bull market than in a bear market. In any case, they are often adjusted from week to week or month to month.

The risks of lending out your crypto
Lending your crypto involves the same risk as borrowing against your crypto. In both cases, you give up the keys to your coins. Keep in mind that the lending platforms do more with your coins than just store them - they might actively trade them on the lending markets. If they mess up, you lose your crypto. There is no government to cover these losses, as would be the case with a normal bank. Incidentally, insurance products are expected to arrive that will cover this risk.

Well-known crypto lending platforms

Without wanting to promote these platforms here, these are a few major players:

• Celsius
• BlockFi
• com
• Ledn
• Nexo
• Abra

In addition, many crypto exchanges also offer lending services. One example is Binance.

Which coins?

The range of coins you can borrow and lend is large these days. Of course, the exact list differs from platform to platform. Bitcoin and Ether and a large stablecoin (USDT or USDC) are really always an option. For the top 15 crypto in terms of market size, it is not difficult to find a lending platform.

New in crypto: borrowing without collateral

The market for decentralized finance (defi) would be much larger if users could borrow like they do now at a bank. Namely without collateral. There are a few projects trying to get this way of borrowing and lending off the ground. Goldfinch is a prominent example. This is much more experimental yet and takes place far away from the big names but instead in Decentralized Finance (DeFi). Goldfinch has set up a lending model where it introduces a third party in addition to the borrower and lender. This is a group of users who assess the creditworthiness of the borrower. To ensure that this group makes the best possible assessment, it must put money on the line itself. Assembling such a pool of good credit rating agents is the biggest challenge of such a system. Read more about it.

Flash loans
In Decentralized Finance, the exotic concept of flash loans exists since 2020. These are loans without collateral, which you have to pay back within the same transaction. They are for example used to do lightning fast arbitrage on price difference of a coin between two exchanges. For advanced traders and 'defi degenerates'!