Crypto-backed loans have become easily accessible to retail cryptocurrency owners in recent years. Here’s why they’re a bad idea (for now).
With the rise of crypto lending and borrowing platforms like BlockFi, Nexo, Unchained Capital, and Ledn, borrowing cash against cryptocurrencies is easily accessible.
But when you take out an asset-backed loan, you run into margin call problems if the value of your collateral falls. If you can’t top up the collateral or pay down the loan, you become a forced seller in a declining market.
For now, I think it’s a good idea to avoid crypto-backed loans, especially high loan-to-value (LTV) loans that don’t allow for big collateral drawdowns.
In the future, if digital assets like bitcoin are much less volatile than they are now, it will be a different story, and taking out bitcoin-backed loans will be a strategic move to avoid selling assets and minimize capital gains taxes.
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