If you own cryptocurrency or non-fungible tokens (NFTs), you may want to tap into the value of those assets without selling them. Thanks to crypto and NFT lending platforms, holders (or HODLers) of large amounts of crypto or valuable NFT collections may be able to get a loan using those assets as collateral, similar to a home equity loan and other secured loans.
Several decentralized finance (DeFi) platforms offer crypto and NFT lending. Because they may require smart contracts and access to your digital wallet, it’s important only to use trusted and reliable platforms. Here’s what you need to know to start borrowing against your crypto or NFTs.
What Is Crypto Or NFT Borrowing?
Cryptocurrency and NFT lending is a relatively modern way to use cryptocurrency as an asset for lending and borrowing. Much like peer-to-peer lending platforms, crypto and NFT borrowing connects diverse people worldwide to enable a decentralized borrowing transaction.
If you have a lot of value tied up in your crypto portfolio, crypto borrowing allows you to borrow using your crypto assets as collateral. For example, you may be able to stake or deposit a portion of your ether balance and get the stablecoin USDC in return, enabling you to cash out and effectively use your crypto as collateral for a USD loan.
Suppose you believe cryptocurrency is going up and don’t want to sell or have large tax gains that you want to delay for the future. In that case, crypto borrowing could allow you to leverage your crypto assets for various financial purposes.
Or, if you own a high-value NFT (such as Bored Ape Yacht Club), you might want to tap into some of that value for a period of time.
Steps To Borrow Against Your Crypto Or NFTs
If you want to move forward with crypto borrowing against your crypto or NFT assets, these are the general steps you can expect to follow:
1. Choose A Platform That Allows You To Borrow
Start by comparing crypto lending platforms for various needs, including their history for security, customer complaints, rates, and supported currencies or NFTs. Many platforms are blockchain-specific or may even be currency-specific. It’s best to pick two or three top options to compare rates and fees.
NFTs don't have as many options compared to crypto, but one popular option is NFTfi.
Tip: Some centralized cryptocurrency exchanges offer staking or lending features requiring less technical knowledge. Those include Gemini, Kraken, and Coinbase, among others. Here’s our list of the best cryptocurrency exchanges.
2. Review Crypto Or NFT Borrowing Options And Rates
Once you’ve zeroed in on your top borrowing resource, you’ll want to understand the details of costs and fees. Remember that you may have to pay transaction fees or gas fees in addition to interest and platform fees.
Most platforms display rates in a form equivalent to the annual percentage rate (APR) for more traditional lending resources. However, keep in mind that most crypt or NFT loans aren't for a long duration - in fact, many are 30-90 days. As such, "annual" percentage rates may not make as much sense.
3. Connect Your Wallet And Setup Your Loan
After you’re satisfied with the loan terms and site security, you can connect your Web3 wallet and begin the borrowing process. In many aspects, it should be a lot like a traditional lending experience, outside of using a Web3 wallet and cryptocurrency or other blockchain assets. Double-check everything, as cryptocurrency transactions can’t be reversed once entered.
4. Execute Your Smart Borrowing Contract
After you’ve double and triple-checked your loan details, click the button to proceed. This will execute the smart contract, which accesses your assets as collateral and pays you the loan proceeds. This should be automated once you click the button to execute or accept all terms.
5. Receive Loan Proceeds In Connected Wallet
The final step is waiting for the blockchain to process all transactions. Your connected wallet should automatically show updated balances when the transaction is complete, and funds are deposited in your wallet. You can use a blockchain explorer to follow the progress until it’s completed.
6. Pay Back The Loan Via The Appropriate Method
To repay the loan, you need to follow the smart contact. You can't just send ETH to the address and expect the loan to be closed out. You typically need to go back into the platform where you got the loan, and execute another transaction to repay the loan and close out the contract.
If you fail to do this, you may lose your collateral.
Costs And Fees
Crypto and NFT borrowing isn’t free. As with a loan from a bank, credit card company, or just about anyone else, you can plan on interest and fees.
Interest is usually split automatically between lenders and the lending company. Lenders deposit funds into an asset pool with others to provide liquidity for borrowers like you. They expect to receive interest for their lending, and you pay it as a borrower.
The interest rate process is similar to how banks work with savings accounts and loans. However, with crypto and NFT lending, there’s no big company in the middle to take most of the interest. While a facilitator takes some of the interest as a fee, it’s much more favorable to borrowers and lenders than traditional banks in many situations.
If you connect to a fraudulent site and authorize the connection to your crypto wallet, the site owner could steal and drain your wallet of assets, including all contained crypto and NFTs. Even big-name celebrities like Seth Green have fallen victim to NFT scams, so it’s important to stay vigilant when connecting to any Web3 application.
Also, it’s important to understand how your funds and crypto may be tied up and when you can repay and withdraw. If your crypto is stuck in a loan when values are on the way down and you want to sell, you could be unable to withdraw.
On the flip side, if you put up your NFT as collateral and the value has dropped, you might also simply consider letting it go - you might come out ahead as a borrower. But you would lose your NFT asset as a result.
The Bottom Line
Borrowing against crypto and NFTs can make sense in many situations if you have valuable assets. If you decide to move forward, be extremely careful where you connect your wallet and who you trust to handle the borrowing process. A single mistake could end up with costly consequences.
If you act carefully and go into the process with good knowledge of how crypto borrowing works, you should be able to achieve a positive experience.
Eric Rosenberg is a financial writer, speaker, and consultant based in Ventura, California. He holds an undergraduate finance degree from the University of Colorado and an MBA in finance from the University of Denver. After working as a bank manager and then nearly a decade in corporate finance and accounting, Eric left the corporate world for full-time online self-employment. His work has been featured in online publications including Business Insider, Nerdwallet, Investopedia, The Balance, HuffPo, Investor Junkie, and other fine financial blogs and publications. When away from the computer, he enjoys spending time with his wife and three children, traveling the world, and tinkering with technology. Connect with him and learn more at EricRosenberg.com.