Trying to get a loan from the bank can be difficult at the best of times, but if you own cryptocurrencies the chances of rejection are even higher.
Most traditional mortgage lenders won’t take into account earnings from cryptocurrency trading when deciding whether you can afford a loan. Many will reject your application simply because you own crypto assets.
It’s a conundrum that drove the launch of blockchain startup BlockFi, a company that lends out fiat in return for crypto. Instead of selling your crypto, you can leverage your Bitcoin, Ether, or Litecoin as collateral towards a USD loan and receive your assets back once the loan is paid off.
What can I use a Bitcoin loan for?
Buying a house isn’t the only reason to consider a Bitcoin loan. BlockFi clients also use its crypto-backed loans to fund home renovations, pay off travel expenses or credit card debt, diversify their investments, or fund a business.
The beauty of a Bitcoin loan is that you don’t have to sell your Bitcoin if you don’t want to. This enables you to avoid a potentially large tax bill, and hold onto your crypto as a long-term investment. You can keep ownership of your Bitcoin while gaining access to the fiat you need to fund projects.
A Bitcoin loan essentially lets you access the value of your digital assets without missing out on any future increases in value.
Crypto loans for the home
You can use a Bitcoin loan to pay for an entire home, make a down payment, or for a crypto real estate investment.
You can also use it to fund a home renovation – whether that’s remodelling your bathroom or building a new extension. Home renovations are expensive so borrowing could be a good option if you want to space out the cost over time.
Diversifying your investments
If you’ve got the majority of your investment portfolio in cryptocurrencies, you might want to think about diversifying your investments to protect yourself from price volatility. One option is to invest in real estate – perhaps by buying a holiday home, a rental property, or commercial property.
By leveraging your crypto, a Bitcoin loan lets you diversify your investments into real estate without having to sell your Bitcoin.
You could also use a Bitcoin loan to purchase other investments, such as equities, bonds, or other cryptoassets.
How do BlockFi loans work?
BlockFi claims its loan application takes only two minutes and that you’ll get funded within 90 minutes.
The payments you make are interest-only, meaning you aren’t paying anything towards the principal amount. It could therefore come as a shock when you eventually have to pay off the principal. BlockFi says the advantage of its interest-only loans is the monthly payments are low. If your crypto loan is at an 8.5% interest rate, your monthly payments are just 0.7% of your loan amount.
BlockFi doesn’t charge early prepayment fees, so you can pay off your loan at any time without being penalised.
One thing to bear in mind is that BlockFi requires a large buffer to secure a loan. What’s more, there’s a process in place to protect BlockFi against losses from volatile assets. If the price of the crypto collateral drops by 35% to 60% in value, a margin call will be triggered. BlockFi will contact you and give you 72 hours to either pay back the loan, add more collateral, or take no action. If you choose the third option, BlockFi will sell a part of the collateral to pay down the loan.
BlockFi loans are currently licensed in 47 states in the US.
Weighing up the risks
If you can’t get a loan from the bank and don’t want to sell your crypto, a Bitcoin loan from the likes of BlockFi might be your best bet. The decision is ultimately up to you, however you need to make sure you’re comfortable with the risks – in particular, the fact that loans are interest-only, have high rates, and are underpinned by volatile assets.