Why Cryptocurrency Rates Are More Beneficial than Fiat Ones – Changelly PRO Analytics

crypto loans vs fiat loans

With the goal of providing learning materials about crypto and blockchain industries, Changelly PRO strives to cover cryptocurrency basics from different perspectives. We’ve prepared an analytical article to explain why cryptocurrency rates are more beneficial than fiat ones. 

When the economy is facing a downturn, banks and other financial institutions decrease interest rates. From the business point of view, it can be a signal for borrowers and investors as lower interest rates might provide better offers for both sides. As a result, cash flows back into the economy, thereby stimulating it. 

Despite the fact that financial institutions have an opportunity to get ‘costless’ borrowing from central banks during the crisis, they maintain savings rates without much enthusiasm. Most of the time, they tend to reduce them to the lowest level possible. The lower the savings account rate, the more banks can earn on their ‘cheap’ money.

Recent global events like COVID-19 pandemic, the oil wars, and so on have proven that notion. Since March 15th, 2020, interest rates throughout the globe have been cut significantly,  while the Federal Funds Rate has been going to zero in the unscheduled cut-rate. 

According to the Federal Deposit Insurance Corporation (FDIC), the average US savings account rate has previously been offering 0.1% APY (Annual Percentage Rate). It has dropped to 0.06% APY since then.  

fred statistics
Effective Federal Funds Rate. Source: Federal Reserve Economic Data

Additional measures that were undertaken by governments to stimulate the economy (like printing out tons of money) have left banks flush with cash. In their turn, investors are now stuck with low profits, and it might take a while before the situation changes. 

Crypto Lending May Be the Solution

Obviously, most people don’t want to think about investing in the current financial situation. However, investors who always search for ways to diversify their portfolios, have paid their attention to alternative assets – cryptocurrencies. 

Traditionally, there are two main crypto strategies – holding (or HODLing) or trading. This fact leads to another conclusion: a great amount of crypto assets is stored in wallets without being utilized. When the crypto industry realized a massive opportunity hidden behind ‘spare’ cryptocurrencies, a few options were introduced. Custodial exchanges, such as Changelly PRO, offer margin trading, which allows to utilize ‘spare’ money left on exchanges to run long positions and make additional profits. The second option is crypto-lending. 

Crypto-lending platforms enable lenders to earn passive income while borrowers can receive fiat currency or crypto assets for their needs (trading, arbitrage, or market-making). 

One of the most promising current trends is DeFi (decentralized finance). DeFi applications represent innovative financial solutions that aim to replace traditional loans with crypto ones. 

Crypto loans are mainly represented by DeFi apps based on the Ethereum blockchain (e.g. Compound, Aave, dYdX). Decentralized applications (dApps) usually provide crypto loans with a certain rate, which depends on the popularity, supply, or demand for the loans.

If there is a consistent demand for loans, then the rates will go up. For example, those who want to increase profits can put DAI stablecoins to the Compound platform and start earning 3.93% APY. Users don’t need to manage assets, fulfill loan requests, etc. In this case, the risk of default is significantly reduced as crypto assets are being lent not in a P2P (person-to-person) way but from a pool where the total supply of tokens are stored.

dai stablecoin

Moreover, each borrower must provide cryptocurrency collateral. It must exceed loan value more than 100% to ensure that the default risk of the system is nearly eliminated. DeFi has been on the rise recently. The total value of loans generated on decentralized lending platforms surpasses one billion dollars.

Crypto Loans Lead the Way

As mentioned above, crypto loans can significantly enhance investment opportunities for lenders. Apart from being extremely profitable, they introduce users to the appealing world of crypto. 

There are multiple ways to make money work. Let us provide an example based on research performed by a cryptocurrency exchange platform Changelly PRO.

In January 2020, an individual decided to invest $1,000 in different types of loans , including traditional and crypto ones. A lender would make at least $10 and a maximum of $28 if he/she made the investment into the crypto loans by September. If the investor decided to deposit his/her funds, the returns would be only $3.

Loan typeAPYProfit
dYdX4.36%$28.79
Compound2.55%$16.83
DeFi Crypto Loan (Aave)1.59%$10.49
Regular 12-month Deposit 0.3%$3
Return from investing 1000 dollars (USDC for crypto), January-August. Source: Changelly PRO 

High profits and no negative returns are the main reasons that make investing in DeFi so attractive. The only thing that might concern an investor is the reliability and security of the project. 

As Ethereum and other crypto assets are now in great demand, DeFi continues its massive expansion currently surpassing $4 billion in total value locked across dApps, protocols, and decentralized exchanges. As a vital part of DeFi, crypto lending platforms managed to attract many users and $2.3 billion. 

If you are looking to take advantage of crypto rates, you can lend your funds to one of our partners such as Nexo or YouHodler, the credibility of which is verified.

USDC, DAI, and other crypto assets can be easily traded on full-featured cryptocurrency exchange Changelly PRO using both spot-trade or margin trading options. Good luck with your endeavors and may the capital be with you.

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