Bitcoin loans are a fantastic element of the digital economic world. They help people access a powerful financial tool that they may not typically be able to receive via traditional services. Plus, they give people the opportunity to obtain fiat or stablecoins without needing to sell their BTC. However, there are some precautions you need to take to stay safe when considering these loans. Let’s take a look at what you need to know and what you should do to ensure your Bitcoin loan is legitimate and works in its intended way.
What is a Bitcoin Loan?
A Bitcoin loan or Bitcoin-backed loan is a loan where you borrow fiat or a stablecoin by using your BTC as collateral.
How Do Bitcoin Loans Work?
Bitcoin loans typically work by having you hand over your BTC as collateral, allowing you to borrow a certain amount of money relative to its value. This is typically less than the worth of the collateral, meaning your loan will be overcollateralized. If you’re using a CeFi service, then the collateral will be sent to an address and stored there for the duration of the loan.
Why is Security so Important in Crypto?
Security is paramount in all forms of financial activity, but when it comes to the Bitcoin and the crypto sector, it becomes especially serious. While this industry is extremely cutting-edge and innovative (more so than perhaps any other financial sector), it is also riddled with dubious projects, questionable schemes, outright scammers, and other nefarious characters.
The industry is a double-edged sword– it has some of the most intelligent and forward-thinking people working in it, as well as some of the most unscrupulous and amoral figures. There are many scams in the sector, along with projects that intend to be legitimate, but which are reckless with their safety protocols or even their coding (in the context of DeFi projects).
This is made worse by two factors. For starters, Bitcoin and the crypto industry are less regulated than other financial markets. While regulations do exist, and are currently in development, blockchain technology is still hard for governments to get their heads around, as it is ever-evolving and acts unlike many of the other financial tools they have come across in the past. This allows for dangerous projects to emerge without getting fully scrutinized.
Secondly, Bitcoin (and all crypto) transactions are irreversible. When it comes to fiat, there are some scenarios where a bank can intervene and cancel a transaction or return your money to you. However, with crypto, this is not possible as there are no true custodians. If you send the wrong transaction, you often have no recourse for getting it back.
For these reasons, it is necessary that you understand how to identify what is safe and secure, and what might not be. Having this type of knowledge essentially counts as risk mitigation or harm reduction, allowing you to navigate this space with more confidence and insights. Knowledge is the only way to truly avoid (and combat) these types of issues.
The Potential Security Risks of Bitcoin Loans
There are several risks you should stay vigilant about. These are some of the main ones that it is wise to be mindful of.
Stolen Funds
Your BTC can get stolen when accessing a Bitcoin loan. This could either happen by scammers intercepting the process of you sending BTC as collateral, or it can happen by hackers stealing the funds from the company or project that is holding your collateral.
In the former case, this can occur by scammers disguising themselves as a legitimate company as a way of getting you to send your Bitcoins to them. This often takes the form of a phishing scam. To avoid this, check you are using the official website by looking at the web address. Perhaps even get the address from a trusted source (such as the company’s Twitter account) instead of Google or a friend, and bookmark it so you never lose it.
Bad actors could also steal your digital assets by malicious software on your device sneakily changing the address where you are sending your BTC to. Some viruses can swap out certain letters or addresses and replace them with ones they own. This is why it is paramount that you check the address you are sending your BTC to is exactly the same as the one you expect it to be. Don’t just check the first and the last few letters of the recipient address, but check the middle letters, too. Some elaborate scams are able to swap out addresses that look relatively identical at the start and the end of an address, but struggle also doing so for the middle-sections.
The second type of theft is where a hacker takes your collateral directly from the lender themselves. There is not a lot you can do on your end to prevent this. Once the collateral is handed over to a lender, it is often on them to keep it safe. Try to stick with companies that have a good reputation for security, and you should not run into this issue.
DeFi Malfunctions
If you are using a DeFi service to obtain a Bitcoin loan, then you could potentially face an issue where the project you are using malfunctions, or ceases to operate in its intended way. This is where something has broken within the code, or where malicious parties have tried to damage it.
The best way to avoid this is to research whether the protocol you are using has been audited, and look into what the results of that audit have been. The more audits they’ve had, the better. If you want to be extra-vigilant (which is never a bad idea), you could look into the reputation of the auditors as well.
Platform Insolvency
While not exactly a security risk, platform insolvency can cause major issues if it affects the project you are working with. For those who are securing a Bitcoin loan through a CeFi service, there can be a risk that your collateral will be lost for good if the company becomes insolvent or even bankrupt. Typically, this only happens when a company has poor risk management protocols in place, and so they have found themselves struggling to keep afloat. In some circumstances, regulators can step in and help borrowers get their collateral back, although this can be a lengthy process.
To avoid this issue, research your lender extensively. Check what reputation they have and whether they are generally viewed as trustworthy. This is why many people turn to Ledn for their Bitcoin loans, as the company has been around for many years, is well-respected and established in the industry, and is hailed for its transparency.
Essential Security Measures for Bitcoin Loans
These are some of the top security measures you can take when trying to obtain Bitcoin loans.
Research Your Lender: You must conduct your own due diligence or research on the lender you choose. Look into their history, their practices, reviews, audits, reports and even team members. In this industry, there is nothing more important than taking matters into your own hands and directly looking into the reputation and activity of your potential lender.
Scan Your Computer For Viruses: Viruses and malicious programs can interfere with your activity. They can swap out wallet addresses without you noticing, lead you to phishing scams, or track your keyboard inputs. Perform a deep scan and remove anything suspicious. Look through your web browser’s plugins as well, as some of these can contain dangerous code.
Use a Cold Storage Wallet For your BTC: It is a good practice to hold your BTC in a cold storage wallet when it is in your possession. Of course, for a loan, you will need to take it to a web wallet (or a hot wallet), but generally, when you are not using it, you should keep it locked away in a wallet that is detached from the internet, as this is where most dangers stem from.
Why Use Ledn For Your Bitcoin Loan?
Many people turn to Ledn for their Bitcoin loans as they have a fantastic reputation within the industry. They have been established for many years, and during that time have built a loyal user-base. They are highly trusted and known for their risk management protocols. Not only this, but Ledn is tremendously transparent with their activity, regularly publishing their open-book reports and proof-of-reserves. This means that you are always kept in the loop, which is great for peace-of-mind, and is a fantastic show of respect to their customers.
Conclusion
Bitcoin-backed loans are an amazing addition to the world of crypto, but to stay safe when doing so, it is good to consider security measures. Keep mindful of the services you are using, and keep a watchful eye on your own BTC. Take every precaution you can think of to ensure your digital assets either stay in your hands or safely go into the right hands.
However, do not let the issues presented in this piece dissuade you from seeking a Bitcoin loan. Bad actors exist in every sector, and they should not prevent us from living our lives in the way we wish. Just ensure you proceed with caution and are highly engaged in the process.
Disclaimer: This article is sponsored by 21 Technologies Inc. and/or its subsidiaries (“Ledn”) and is for general information, discussion, or educational purposes only and is not to be construed or relied upon as constituting legal, financial, investment, accounting, tax, estate-planning, or other professional advice or recommendation. Please read Ledn’s full Risk Disclosure Statement and Disclaimers.
