How crypto lending works?
Since most of my experience as a software engineer was in blockchain, I’ve always considered cryptocurrencies a potential investment opportunity. You might argue that crypto is a scam, but does that mean you think you’re smarter than Elon Musk, the Winklevoss Twins or BlackRock Capital? Even if you still think so, there’s a good chance your own country holds some Bitcoin while you’re scrolling the memes. And various sources prove it, like Forbes or Coingecko.
Crypto provides an absurd amount of financial instruments to leverage. You can trade, invest, gamble with futures, stake your funds or lend them for interest. I don’t know all of them and am often skeptical of most, but honestly, that’s usually because I don’t understand them fully. My attitude often changes once I fill in the gaps, and today I want to talk about one of those moments.
How lending works in crypto
A couple of years ago, I stumbled across crypto lending platforms and thought they were hilarious and pointless. Why? Because I didn’t understand them. My biggest confusion was that to borrow anything, you had to deposit collateral—and your loan could only be a fraction of that collateral. For example, if you put in 1 Bitcoin worth $50,000, you could only borrow about $30,000. Sounds ridiculous, right? That’s how I felt. I couldn’t see why I’d need to lock up $50,000 just to borrow $30,000 and pay fees on top.
At the time, I didn’t have spare money to play around as an investor or enough motivation to dig into the details, so I just ignored lending platforms. But recently, a friend gave me a great explanation of how they work and their benefits. Now I get it, and I want to share that with you.
Crypto works a lot like banks and other traditional financial systems. From what I see, people who are familiar with ordinary finances tend to grasp crypto easily and vice versa. So let’s start with the basics and apply them to crypto.
Take an ordinary bank. It essentially does two things: accepts deposits and gives loans. Loans have higher interest rates than deposits. If you want to borrow a large amount, you need collateral. If you can’t repay, the bank keeps your collateral. Pretty straightforward, right?
Just knowing this much lets you earn about 6.8% annual percentage yield (APY) by depositing on crypto lending platforms like Aave. For comparison, the average APY on savings accounts in the U.S. is 0.43%, though some local banks offer around 4%. In the EU, you might get up to 5%. Countries with weaker economies, like Turkey or parts of Eastern Europe, offer even higher rates. Sure, crypto is risky, but banks go bankrupt too. One more bonus with crypto platforms is that you can usually withdraw your money (and interest) anytime, while traditional banks often lock your principal until the term ends and pay interest monthly.
How to earn crypto in a bull market
All above is still the basic essentials. What was my personal discovery is how and why you should consider borrowing in crypto. Imagine you bought your bitcoin or your favorite cryptocurrency and expect it will grow further. Let’s take the example above, where bitcoin costs $50,000. You have 1, and you expect it will eventually reach $100,000, like what we see today. So you don’t want to sell it, but you need some spare money temporarily—or better yet, you want to increase your income by reinvesting your money. So you deposit your bitcoin, borrow $30,000 and buy more bitcoin. You can even reinvest it again. Just rinse and repeat. The more you do it, the more you gain profit, though the risk raises exponentially as well.
How to earn crypto in a bear market
What about a bear market, where Bitcoin’s price is dropping? You can profit here too, but the strategy flips. Instead of depositing Bitcoin and borrowing USD, you deposit USD and borrow Bitcoin. Let’s say you invest $100,000, borrow $60,000 worth of Bitcoin and sell it immediately. When the price drops, you buy it back cheaper, repay your debt and pocket the difference.
How to reinvest in crypto
Here’s another opportunity worth mentioning. Imagine your friend wants to open a coffee shop and invites you to invest. You don’t have the money, but you believe in the business and expect a 15% APY. If your bank offers loans at 10% interest, the math works—you net a 5% profit. Crypto offers similar opportunities. Decentralized exchanges (DEXs) like Uniswap welcome investors (a.k.a. liquidity providers). You can borrow funds from lending platforms and invest in these exchanges, just like you’d invest in your friend’s coffee shop.
Conclusion
Crypto is risky, sure. But a lot of the hate comes from ignorance. Crypto is complicated. It has an overwhelming number of financial tools, which is both its strength and its weakness. Weakness because it takes time to figure out. Strength because the opportunities are endless once you do. My article isn’t a call to action—it’s just another tool for your financial arsenal. I’m sharing what works for me, and if it helps me on my path to financial independence, maybe it can help you too.