Since Bitcoin is not only a form of currency, but also a store of value, it can be used like other assets as collateral for a loan. A Bitcoin loan is similar to a traditional loan offered by banks, except there are hard credit checks, there are no strings attached to the money, and interest rates are the same for everyone. That is because most of the risk is not on the lender but on the borrower, since the borrower is putting up more than enough Bitcoin to cover the loan and interest payments.
To understand how bitcoin loans work, you’ll need to understand what bitcoin is. Basically, bitcoin is a cryptocurrency that operates entirely online. It’s decentralized, meaning no particular organization, individual or country controls it. This allows bitcoin users to make direct transactions between one another without a third party — like a bank — getting involved. Transactions are recorded and published on an electronic ledger called a blockchain, which anyone can access. The blockchain relies on several anonymous computers — called miners — to verify the legitimacy of transactions before they join the blockchain to prevent fraud. Rather than the blockchain existing on one server, leaving it vulnerable to hackers, it’s distributed to all bitcoin users.
On a basic level, bitcoin loans work like your standard term loan: It’s borrowed money that you pay back plus interest and fees over a predetermined period of time. You pay it back in fixed installments depending on your loan agreement. You can also get bitcoin lines of credit and short-term bitcoin loans. That’s where most of the similarities end. Because bitcoin isn’t affiliated with any central government or banking institution, your typical bitcoin loan will be from other bitcoin users. You’ll also need to factor any commission on the current exchange rate into your fees.
The easiest way to get a bitcoin loan is through a peer-to-peer platform that connects investors with borrowers, usually for a fee. To borrow through a bitcoin loan platform, you first need to set up an account and wait for verification.
Bitcoin lenders don’t rely on the typical ways of judging your creditworthiness, such as your credit score or debt-to-income ratio. Instead, platforms give you a trust score — sometimes called a credit score or rating — based on how much they’re able to verify about your identity and financial history. To get a high trust score, you might need to submit extensive documentation.
Once your account is verified, you typically need to select your loan type and submit your application form. You can receive loan offers in as little as a few hours and get your funds instantly once you accept.
Because you won’t be going through a traditional lender, some of the documentation you’ll need to provide to get a bitcoin loan will be different than with a standard loan.