According to a study by the Norway-based crypto intelligence firm Arcane Research, Bitcoin is emerging as the “perfect collateral asset for the future.” It’s now challenging bonds and cash-based securities as collateral. Currently, cash-based securities and government bonds dominate the $20 trillion worth of collateralized assets.
Bitcoin, like other cryptocurrencies, doesn’t have credit risk or counterparty risk (the risk of one of the parties defaulting on its contractual obligation). Moreover, you can trade Bitcoin 24/7 and transfer it instantly to anyone around the world.
While the Arcane Research study focuses mainly on Bitcoin and the big picture, one of the benefits of owning crypto is that you can access quick and easy loans even if your holdings are small. And you don’t have to go through credit checks that are part of the process in traditional loans. It offers HODLers a way to access liquidity without having to sell their crypto assets.
Individuals could choose to take out loans against cryptocurrencies, NFTs, and other blockchain-based virtual items rather than selling them for a variety of reasons.
Maybe you believe the assets you hold have a significant upside potential, so you don’t want to sell. Or maybe you want to hold it long enough to avoid short-term capital gains taxes. Your reasons could be anything from taking advantage of arbitrage opportunities to avoiding margin calls on collateralized debt positions, to buying another crypto asset that could increase in value.
Leveraging your crypto as collateral could add to price appreciation and boost your aggregate portfolio returns.
DeFi platforms such as Hoard Exchange, Compound Finance, and others are enabling individuals to generate substantial returns by leveraging their digital assets as collateral. Hoard Exchange, for instance, allows users owning ERC-20 or ERC-721 tokens to borrow against these tokens. Borrowers can deposit their NFTs, crypto assets, and other virtual items to access loans.
Hoard Exchange, a leading digital goods marketplace, allows users to trade, rent, lend, and borrow in-game items, digital art, domain names, and NFTs.
Yield farm and stake
To maximize returns, traders and HODLers deploy the borrowed assets to yield farming and staking opportunities.
Yield farming has become an attractive investment strategy as it promises to offer higher returns than most conventional investments. It involves depositing crypto assets into a lending protocol to earn interest from trading fees. Yield farmers are also rewarded with additional cryptocurrencies, which could further appreciate in the future to boost your returns.
Staking involves locking your tokens in a wallet or staking pool to validate transactions and participate in other network activities. Stakers are rewarded for contributing to the network. The annual percentage yield ranges from 3% to 300% depending on the token you stake. It’s like participating in a project’s corporate governance and security, and getting paid for it.
If you own NFTs, domain names, and in-game virtual items, you can use them as collateral to obtain loans on peer-to-peer platforms such as Hoard Exchange and stake the borrowed assets. It dramatically reduces the opportunity cost of holding digital assets, besides generating handsome yields.
The exact amount you can borrow against your assets would depend on the collateral you are bringing, though Hoard Exchange allows you to set a minimum value you want to receive as loan.
The loan to value (LTV) ratio is a metric that reflects the value of loan you can obtain. If you put $100 worth of collateral and get a $60 worth of loan, your LTV is 60%. Most DeFi lending & borrowing protocols keep the LTV in the range of 50-75% to maintain a margin of safety, given the highly volatile nature of cryptocurrencies.
As the crypto and DeFi markets keep growing, traders have more options than ever before to easily access crypto-collateralized loans and maximize returns through yield farming and staking opportunities. Platforms like Compound Finance and Hoard Exchange have opened a whole new world of opportunities for traders.