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Cryptocurrencies as Collateral For a Loan

Ved Prakash, Newsblare
0 Comments| November 30, 2018

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If you have watched the price of Bitcoin in the past week, it has taken quite a fall from grace, and as of this writing is down to under $4,000, when not just a year ago the value was nearing $20,000!

When we use the word “volatile” in investing, Bitcoin and other cryptocurrencies are under the definition of the word.

However, even with all its volatility, there has been money to be made, and many investors have reaped the rewards. However, reaping the rewards usually means cashing out, selling your investment, especially when it comes to Bitcoin and other cryptocurrencies.

But what if there is another way….another way to make your investment work for you, while still retaining the asset itself???

One of those ways is to borrow against the value of your Bitcoin and other cryptocurrency investment. A “bit coined backed loan”.

If you own stock or shares in a company and they have a value, you can borrow against them. Cryptocurrencies such as Bitcoin and others, also have a value, so why not take out a loan against them.

Once again the question is asked, “why amass all this wealth on the blockchain and digital world, if you cannot use it, or put it to use in the real world?”.

And one way to do this is to use the digital currency as collateral for a loan.

And guess what, credit scores and credit scoring does not need to be one of the criteria used as a basis to grant the loan. These loans are secured loans, secured by the value of Bitcoin, or whatever cryptocurrency you currently own.

Sounds good, on paper, but what are the risks and issues surrounding this concept?

The volatility is one issue.

Collateral

In taking out a loan, loans can be divided into two (2) categories, secured and unsecured.

Secured loans have something securing the loan or collateral, where as unsecured loans do not. Historically, secured loans are less of a risk to the lender, in part due to the security of having collateral, something physically securing the loan, something of value, and something that can be repossessed and sold to offset any losses the lender may experience.

The first thing that comes to mind when one thinks of a secured loan is a mortgage, a loan secured by property. However, almost anything of value can be used as collateral for a loan, and Bitcoin and other cryptocurrencies are no exception. They can be pledged to some lenders as collateral for a loan.

However, we must once again look at and address the issue of volatility.

If one wants to use their Bitcoin Empire as collateral for a loan, they may find the lender requires a substantial amount of the cryptocurrency to be used to be pledged for the loan. A loan of £100,000 may require a pledge of £150,000 in digital money.

This again is due to the up and down nature and value of the cryptocurrency. However, it does give the borrower/investor £100,000 cash to work with, which could be to invest in more Bitcoins or other investments, or to buy property.

While still a somewhat newish idea and concept, borrowing against your cryptocurrency investment, does give you a way to access cash, without losing or selling your investment.

The fact you can take something that is not tangible, such as a cryptocurrency, and turn it into something tangible, such as a property or another physical form of investment, is a unique concept.

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