Crypto loans offer lower interest rates and better repayment options than most traditional banks - making them an appealing option to investors who’d like to widen their portfolio. On top of this, the DeFi space is revolutionizing the market, offering crypto loans without collateral. Learn everything you need to know about the best crypto loans, including how crypto loans work, the most trusted crypto lending platforms, crypto loans without collateral and what it all means for your tax bill.
What is a crypto loan?
Crypto loans let you borrow crypto. There's two different types of crypto loans available - crypto loans with collateral and crypto loans without collateral.
There are many reasons an investor may take out a crypto loan. Hodling is a common strategy, but idle assets do little for crypto investors while they wait for the moon. A crypto loan can help increase your liquidity without depleting the assets you hold.
How do crypto loans work?
It depends on the type of loan you're taking out and whether you're getting a crypto loan with or without collateral. We'll cover both.
Crypto loans with collateral
Let's say you hold 1 BTC. You're waiting for BTC to hit 100K to sell and you're confident it's going to get there eventually. But you need liquidity now and don't want to sell your BTC. You can use your 1 BTC as collateral to get a loan. Many large centralized crypto exchanges like Binance and Coinbase offer this service with a wide range of cryptocurrencies, loan terms and interest rates.
With crypto loans with collateral - you'll often need to overcollateralize, meaning you'll need to lock up more crypto than the overall value of your loan. This is due to the volatility of cryptocurrencies and protects the lender from the value of the borrowed crypto falling below the value of the loan.
Once you've paid back your loan and the loan interest, your collateralized crypto is returned to you.
Crypto loans without collateral
Unsecured lending sprung up as a result of DeFi protocols advancing. There are many unsecured DeFi lending protocols - but they all work in a fairly similar way in that they use smart contracts (code) to execute loan terms and conditions.
Collateralized DeFi loans exist - but due to the trustless nature of DeFi, they often require loans to be overcollateralized to protect lenders in the event of default. This reduces liquidity in the markets, and the DeFi space needs liquidity to function.
Not only this, but one of DeFi's main goals is to create permissionless, trustless access to finance. Many people taking out loans don't have the collateral in the first place. Crypto loans without collateral can give more people access to finance when they need it.
At the moment, this space is in its infancy. Primarily you'll find flash loans being offered by major DeFi protocols like Aave, dYdX and Uniswap. These flash loans (or flash swaps) allow investors to momentarily loan tokens or coins - most often ERC-20 Tokens or stablecoins - to make a given transaction.
Flash loans are both borrowed and returned within seconds in most instances and it's all executed by smart contracts that set the terms and conditions. If the borrower doesn't repay the capital or the conditions of the smart contract aren't met, the transaction is reversed and the funds return to the lender.
Investors have flocked to flash loans as they allow them to profit on arbitrage opportunities - where you buy on one market and sell on another. So when a token differs in price on one exchange to another, investors can use flash loans to make the most of these opportunities, even if it's a 1% difference, with a large enough flash loan, the gains are substantial. In fact, in July 2020, Aave alone issued more than $130 million in flash loans every day.
Why get a crypto loan?
Crypto loans come with a lot of perks. They increase your liquidity without depleting the assets you hold - giving you cash flow as and when you need it. This can allow you to make further investments, essentially putting your idle assets to work.
As well as this, one of the big benefits is that the majority of crypto loan providers aren’t interested in your credit score, unlike traditional banks. This is a huge problem for millions of people around the world who are denied access to finance through traditional financial systems. In some instances - like with Coinbase - you can borrow cash using your crypto as collateral, meaning your digital assets can provide you tangible, real world value without selling.
Crypto loans also benefit from lower and more flexible interest rates, loan amounts and loan terms than you’d get from traditional loan providers like a bank - letting you borrow more, for longer and for less.
Perhaps the biggest benefit of all though is when it comes to your tax bill. In most countries, when you sell, trade or spend crypto, you’ll pay Capital Gains Tax on any capital gain (profit) you make as a result. So if you’re looking to sell an asset or trade an asset to invest in another - you’ll likely have a tax bill. But crypto loans can give you access to more crypto (or cash) without triggering a taxable event because you haven’t disposed of your crypto.
Crypto loan risks
Like everything in crypto - crypto loans aren’t without their risks.
The unsteady price fluctuations of cryptocurrencies can lead to a margin call. This is where the borrower will need to put up more crypto in order to maintain their loan to value ratio, or else the loan will be liquidated.
When it comes to uncollateralized flash loans, as they're mostly executed by smart contracts you might think the risks are minimal. After all, the code sets the terms and conditions and the transaction is simply reversed if they're not met. But flash loans are new and so are the smart contracts running them. This has allowed cyber criminals to exploit vulnerabilities in so-called flash loan attacks.
Just this year, a flash loan was used borrow huge sums on the PancakeSwap lending protocol to manipulate the price of the PancakeBunny's native token BUNNY in off-market lending pools, causing the price to crash by 95% and netting themselves around $3 million in the process.
How to get a crypto loan
If you’d like to take out a crypto loan - it’s pretty simple, all you need to do is pick your crypto loan provider and agree to the terms and conditions. But with so many crypto loan providers - which do you pick? We’ve got you covered with our list of the best crypto loans from both the centralized and DeFi markets.
Best Crypto Loans
- For the widest range of crypto: Binance.
- For borrowing cash: Coinbase.
- For large loans: BlockFi.
- For flexibility: Crypto.com
- For lowest interest rates: Celsius.
- For flash loans: Aave.
- For self-repaying loans: Alchemix.
- For flash swaps: Uniswap.
- For leveraged trading: Mango Markets.
Binance crypto loans
As one of the largest centralized crypto exchanges - Binance crypto loans are a solid bet. Borrowers can choose a loan term between 7 and 180 days, with no interest penalty for early repayment. Pick from more than 60 different popular cryptocurrencies to borrow alongside a wide variety of cryptocurrencies accepted as collateral. The initial LTV is 65%, with a margin call at 75% and liquidation at 83%.
Coinbase crypto loans
Another huge and well-trusted crypto exchange - Coinbase lets investors borrow cash against their BTC, with a low APR of 8% and flexible repayment schedules. For investors who need liquidity in the short-term but don’t want to sell their crypto - this loan is ideal. In even better news, there’s no credit checks as it’s all based on your crypto collateral and your loan can be immediately deposited into your PayPal or bank account. The crypto you use as collateral is stored securely by Coinbase and never lent out or used for another purpose, so you know your asset is safe while you repay your loan.
BlockFi offers low interest rates for large loans. The minimum loan amount starts from $10,000 USD and the loans are based on a 50% LTV - so you'll need half the loan amount in collateral. BlockFi accepts 5 major cryptocurrencies as collateral including BTC, ETH, LTC and PAXG. If you’re looking to make a large investment and need cash not crypto - BlockFi loans are a potential solution that can help you hold your assets, increase cash flow and even avoid a large Capital Gains Tax bill (more on this in a minute).
You can borrow up to 50% of your crypto collateral with Crypto.com credit. Their flexible credit calculator tool lets you set most of the terms of your loan. The interest rates can even be reduced by staking CRO - the platform's native coin. If you stake enough, you can reduce your interest rate by a considerable amount.
Aave is one of the largest DeFi lending protocols and offers both collateralized crypto loans and uncollateralized flash loans. Due to the high LTV rates - you’ll find very low interest rates in return. As well as this, thanks to access to four different markets (Aave V2, AMM, Polygon and Avalanche), you’ll find a good choice of coins and tokens to borrow.
Aave pioneered flash loans and loans out millions in flash loans every day - making it one of the safest DeFi protocols to borrow on.
Alchemix self-repaying loans
Self-repaying loans might sound too good to be true, but thanks to some clever smart contracts, the developers at Alchemix have pulled it off. All borrowers need to do is deposit stablecoins as collateral to borrow against. This collateral is then deposited into Yearn.Finance vaults where it generates yield which repays the loan. All without you ever lifting a finger. Currently Alchemix only accepts DAI, but this looks set to change in the future.
Uniswap flash swaps
Uniswap flash swaps are similar to Aave flash loans in that they let investors exploit arbitrage opportunities in a given liquidity pool without needing capital to do so. This essentially incentivizes investors to balance on-chain asset price with off-chain asset price.
Mango markets is a decentralized exchange built on the Solana chain that offers both leveraged trading. You can borrow funds for up to 10x leveraged trades and borrowing rates start from as low as 0.8%. Of course, as with all leveraged trading - due to the volatile nature of the crypto market only experienced investors who fully understand the risks should take out positions.
Crypto loans tax
As we mentioned above, crypto loans offer some big perks when it comes to your tax bill - but that doesn’t mean you’ll get out of paying any tax entirely. We’ll start with the good news.
You won’t pay tax for taking out a crypto loan. It’s not considered income and you’re not disposing of your crypto by selling it, trading it or spending it. So Income Tax and Capital Gains Tax don’t apply. You would however still need to check yes on the virtual currency question on IRS Form 1040.
This means you can use a crypto loan to increase your liquidity and avoid paying Capital Gains Tax on crypto. So if you’d like to invest in another asset - or if you need cash but don’t want the tax bill that comes with selling crypto - you can take out a crypto loan to swerve the tax bill.
Let’s take Coinbase loans as an example. You can use BTC as collateral to get a cash loan. This means you never dispose of your asset (by selling it, swapping it or spending it) - but you still get cash. Spending your loaned cash is tax-free.
You can then repay your loan in cash - not crypto. This matters because if you’re repaying your loan in crypto - this could be considered spending crypto, which is subject to Capital Gains Tax.
Your interest expense can in some instances be written off on your tax return - provided you’ve used your crypto loan proceeds for investment or business purposes. For example, using the loan proceeds to purchase other cryptocurrencies, stocks or securities. If this is what you used the loan for, you could deduct the interest expense on your tax return as an investment interest expense on Form 4952. However, if you’re using the crypto loan proceeds for personal expenses - like a car - this would not be tax deductible.
There are however a couple of instances you should know about where you may pay tax on your crypto loan. The first is if you fail to pay back your crypto loan - because then the platform will liquidate your collateral to cover their losses. Because your collateral would be sold - this would trigger a Capital Gains Tax event which you may need to pay tax on.
Similarly, if the price of your crypto collateral falls below the LTV threshold - this could also trigger liquidation. As above, the liquidation of your asset (sale) would trigger a Capital Gains Tax event and you may need to pay tax.
Simplify crypto tax with Koinly
Koinly crypto tax calculator simplifies your crypto taxes. No more guessing your gains, losses or income - Koinly does it all for you.
All you need to do is sync all the wallets and exchanges you use with Koinly. You can do this using API integration in minutes or by importing CSV files of your transaction history. Once you’ve done this, Koinly calculates all your taxable transactions, including capital gains, losses, income and expenses. You’ll find all this information and more in an easy to read tax summary.
You can then download pre-filled tax reports based on your location, saving you hours of filling out forms. For example, for US investors Koinly can generate your Form 8949 and Schedule D for you, as well as TurboTax and TaxAct reports.