Crypto-backed credit lines, like fixed loans, are an opportunity for crypto investors to obtain capital from lending services without selling their assets. In both cases, investors commit their crypto assets to a lending platform or product as collateral and receive another crypto asset (usually stablecoins) or fiat currencies. But crypto-backed credit lines offer increased flexibility to crypto-backed loans. In this article, we explain how crypto-backed credit lines work, how to use them, and the best situations to use them with clapp.finance.
How crypto-backed credit lines work and how to use them (Using Clapp Finance as an example)
Credit lines allow you to deposit collateral, get a credit limit, and withdraw bits of the approved fund at any time, provided you don’t exceed the limit. Let’s explore how this works, using Clapp Finance as an example. You can estimate your credit line using the calculator on the Clapp Finance platform.
To open a crypto-backed credit line to borrow USDT with Bitcoin;
The LTV ratio determines the credit limit
The LTV ratio on Clapp at the time of writing is 70%. That is, you will receive a 700 USDT credit line if you deposit $1000 worth of Bitcoin on the platform.
Credit lines are flexible
You can pay back the amount you used and borrow again at will, provided you do not exceed the credit limit and stay below the liquidation threshold.
Liquidation occurs above the liquidation threshold
Check your loan details to know the liquidation threshold. Here, it is 90%. You are required to increase your collateral or repay your loan before it reaches this point.
Interest rate may vary depending on the LTV ratio
Check the LTV specification for zero-interest loans. Here, if the LTV is below 20%, you can borrow USDT without paying interest.
Crypto-backed credit lines Vs One-time crypto loans
Crypto-backed credit lines and fixed (one-time) crypto loans are the most popular crypto lending strategies. Here are the major differences between them;
| Feature | Crypto-backed credit line | One-time crypto loans |
| Loan availability | Users can withdraw in bits and on-demand | The full borrowable amount is withdrawn at once |
| Interest structure | Interest is paid on used loans only | Interest is paid on the full approved loan. |
| Liquidation risk | Usually lower but harder to calculate | Higher but more predictable, full interest rate is known instantly |
| Collateralization | Only the used amount is collateralized | The full amount is collateralized. |
Points to consider before opening a crypto-backed credit line
Consider the following before opening a crypto-backed credit line;
Liquidation risks and crypto volatility
Lending platforms use different liquidation systems, which can significantly affect your loan strategies. Before opening a crypto-backed credit line, evaluate the liquidation terms of the platform you wish to use, compute the LTV ratios, and ensure that these terms are favorable and sustainable.
The platform’s fund custody strategy
Counterparty risks are an important factor to consider before applying for a crypto-backed credit line. If you intend to use a centralized lending platform, ensure it has a tamper-proof security system to hold customers’ deposits. Smart contract risks also apply to decentralized lending protocols. We also recommend using a reputable and regulated platform to avoid losses due to mismanagement of funds.
Credit line utilization policies
Platforms like Clapp Finance only offer zero-interest loans when the LTV is below 20%. This may differ on other platforms. In general, review the terms that apply to the credit line service and evaluate how this affects your lending strategy. Alongside factors related to security and regulation, favorable usage policies are a very important point to consider.
Conclusion: Should you use crypto-backed credit lines?
Crypto-backed credit lines are a creative way to borrow crypto. The flexibility allows users to incorporate financial strategies that wouldn’t have been possible with fixed loans. It also promotes cost-efficiency as borrowers get the opportunity to pay interest and manage liquidation risks only for the amount they utilize. Generally, you should use crypto-backed credit lines if you have a financial need that requires you to obtain capital one at a time, but given the additional terms that usually apply to crypto-backed credit lines, it is important to consider the conditions before applying. Ensure that the platform’s policies align with your strategies and monitor your credit line to prevent liquidation.
Source: https://coingape.com/press-releases/clapp-finance-guide-how-crypto-backed-credit-lines-work-and-why-theyre-a-smart-move/
