Peer-to-peer and crowdfunding systems are changing the conventional debt structures. Blockchain platforms that virtual currencies like Bitcoin dominate are having an increase in P2P lending and borrowing. Traditionally, borrowing and lending have been vital components of the banking sector.

But financial technology platforms have increased over the years, disrupting this dynamic. Based on this innovation, blockchain technology supports crypto-dominated lending and borrowing.

Understanding Bitcoin Lending

As the name suggests, Bitcoin lending involves this virtual currency. Bitcoin is a digital asset whose basis is blockchain technology. And this technology makes Bitcoin decentralized, more transparent, and tamper-resistant. It also makes users pseudonymous.

Unlike fiat money, no sovereign nation or entity controls Bitcoin. And people can send and receive Bitcoins at any time and from anywhere in the world. Today, the world is having an increase in Bitcoin adoption. People are rushing to crypto exchanges like to purchase this virtual currency. Such platforms let people and businesses buy Bitcoin with fiat money. Also, Bitcoin lending platforms are emerging and facilitating financial activities in the decentralized economy.

Initially, Bitcoin lending platforms solved the insufficient cash flow problem by emulating conventional lending products. However, Bitcoin lending can now unlock this digital asset’s utility by securing crypto as the collateral for loans. Consequently, Bitcoin holders can get loans in fiat currency or even cryptocurrency. Thus, a borrower can get financing without losing their digital asset.

For instance, an investor could have Bitcoins in their digital wallet. At the same time, Bitcoin prices could be rising. Thus, the investor may need financing but doesn’t want to lose Bitcoin to benefit from its increasing value.

Bitcoin lending can help such an investor to secure a crypto-backed loan using their tokens as collateral. Thus, the investor can get financing for unexpected expenses and still hold their digital asset to benefit from the increasing value.

The Risks

Bitcoin lending platforms are either decentralized or centralized. And these architectural designs are partly based on the specific approach to interaction and custody with regulatory protocols.

Nevertheless, both decentralized and centralized Bitcoin lending and borrowing have their risks. Here are the top dangers of Bitcoin lending that every lender or borrower should know.

Liquidity Risk

When using a centralized Bitcoin lending platform, a borrower might have a higher liquidity risk exposure. For instance, the collateral that a borrower uses can fall below the initial value that prompted the lender to accept it. That means the lender will require the borrower to supply additional liquidity. If not, the lender will lose the original investment through liquidation.

Also, decentralized finance platforms use liquidity pools, which can cause interest rate volatility when users move large capital amounts in or out.

Regulatory and Taxation Risk

Whether consumers utilize a decentralized or centralized Bitcoin lending platform, they can face regulatory and taxation risks. Most decentralized Bitcoin lending platforms don’t comply with AML, KYC, and other regulatory protocols. Consequently, the uncertainty element remains evident, especially in new decentralized crypto lending practices.

Technical Risk

Decentralized finance and crypto lending protocols use intelligent contracts. That means they present the risk of a corrupt code. Consequently, hackers may exploit the intelligent contract’s vulnerabilities and steal funds from users of the lending platforms. Also, hackers can crash a crypto lending platform.

Final Thoughts

Whether a borrower or a lender utilizes a decentralized or centralized crypto lending platform, they can leverage Bitcoin to increase asset productivity and maximize profits. However, Bitcoin lending comes with risks that lenders and borrowers should understand. And with this knowledge, an investor or a borrower can use crypto lending maximally to their benefit.