How do crypto Loans work and how do you get benefitted from them?

In this article, we concentrate on loan/Borrow from Cex(Binance). The process is almost the same in Decentralized protocols as well. The only thing we need to do is to choose the best platform which provides the interest at low rates

Via crypto loans:

Through Crypto Loans sections:

So, Let’s get to know about “LTV”.

What is LTV?

The ratio of the Loan value to the collateral value is called LTV.

LTV = Loan Value/ Collateral value x 100

The LTV can be referred to either in the ratio (Decimal value or percentage).

So, Binance initially provides the loan of 65% of our collateral, So at the time of borrowing, our LTV is 65%.

We also need to concentrate on three terms while we borrow

1. Initial LTV
2. Margin LTV
3. Liquidation LTV

Margin LTV means at which you will be notified via email to add more collateral to avoid the liquidation possibility, It is the only notification because it is nearning to the liquidation LTV.

Liquidation LTV is where your assets get Liquidated and they recover the borrowed funds plus interest from the collateral along with a 2% fee for liquidation and the remaining is left in your wallet.

So, For example, we want to borrow ADA using BUSD as collateral.

NOTE: Let us assume that the ADA price is 1$ at the time of borrow.

If we supply 100 BUSD, the exchange will give us 65 ADA tokens(Because the initial LTV is 65%) So exchanges give 65% loan to our collateral.

Now if the price of ADA increases, Our loan value also increases, correspondingly our LTV increases.

So, Our liquidation equation becomes

(LV+Interest)/CV x100%≥ 83%(Liquidation LTV)

Then Binance takes LV from the collateral and Interest and a 2% fee for liquidation and the remaining will be left for you.

Via Margin wallet:

It is very similar to margin trading,

In margin trading, if you have 10000$ and 1 BTC is 10000$

The finance offers you up to 3x cross leverage so now you can buy 3 BTC using $10000, where $10000 will be yours and the remaining 20000$ will be exchanged’s.

So until the trade remains open you will apply for tax for that $20000 provided by finance,

So if your trade is in profit you can keep it as you want, But if your trade is in loss, Once it reaches $10000 it will automatically close the position and the total $10000 loss will be yours, and the remaining 20000$ will be taken by the exchange.

Coming to borrow in margin wallet:

You can borrow up to 50% of the collateral you provide so that you will be able to move your funds out of the exchange, You can also borrow more percentage but you can’t withdraw it. So only take half loan from your total collateral.

It’s just for the safe side if you borrow half amount even you can do more

Isolated Margin borrow:

In the isolated type, you will select the asset you want to supply as collateral for the borrow, whereas in the isolated whole wallet will act as collateral which is slightly risky or unprofessional compared to isolated.

choose the pair(ADA/BUSD) and choose BUSD as collateral

If you want to borrow ADA and supply BUSD as collateral.

Let's assume ADA be 1$ at the time of borrowing.

If you supply 100 BUSD you can borrow 50 ADA.

So, Here this trade exists until your loan value becomes 100$, Once it reaches 100$ your collateral will be liquidated.

Liquidation equation:

LV+Interest≥CV

So let’s interest per day is 2$, Now it is 2nd day. So 2$ is our interest.

So, 2+X(LV)≥ 100(our collateral)

once ADA our loan value reaches 98$ our assets gets liquidated,

Here Liquidated means, Binance will buy 50 ADA at the market price using the 98$ present value and 2$ interest will be there.

So these ADA which was given to us have been restored and also they have their interest.

Indirectly if we borrow a 50% loan, We get liquidated only if our borrowed assets become 2x.

Because our initial LV is half so to get it matched with CV it needs to become 2X, So the chance of liquidation via Margin loan is less.

Cross Margin Loan:

Same as isolated, But we can’t choose asset here it directly counts the total value in our margin wallet as CV and we can take half of that as a loan.

You directly choose ADA(Borrow asset) and the whole wallet is Collateral here

So if you have 100 BUSD and 100 usdt and you choose cross margin and borrow, You can borrow up to 100 ADA tokens safely.

Or if you want to only choose a certain type of assets as collateral and only a certain amount of dollar for collateral then you can use an Isolated margin and choose the asset you want to supply for collateral and borrow half of it.

Utilizing effectively:

1. There will be IDO/Presales of projects where they use oversubscription methods.

So, The best way to get a higher allocation in those sales is we need to have more funds, But they usually don’t prefer stable coins for sale, They prefer tokens like BNB for BSC projects, Sol for Solana projects.

We don’t want to exclusively buy the tokens for the sales, Because the possibility of dump is more if the IDO project is very hyped.

So we use out stable coins as collateral and borrow the tokens we need and the remaining amount of tokens you need to repay and get back the collateral. In this way, you can reduce risk and also get a higher allocation in sales.

2. When the new AMM protocols launch, they usually offer a high APR to attract users to their protocol. To borrow the tokens from the other platform using stable coins as collateral and using those tokens to yield farm there at high APRs.