While Bitcoin (BTC) continues to hover around the magical 10,000 price level, altcoins continue to fight an uphill battle. Simply put, hopes of a future bull run continue to diminish as Bitcoin maintains its dominance. One school of thought is that a few altcoins will survive and flourish, but which ones are anyone’s guess. That being said, it’s hard to go wrong picking against the top coins like Ethereum (ETH), Ripple (XRP), Litecoin (LTC), and EOS. These projects have managed to find a foothold in the market and have a better chance than most of staying there. While traders wait for their positions to increase in value, one opportunity that may be worth looking at is initiating a collateralized debt position.
What is a Cryptocurrency CDP?
In traditional terms, a CDP is essentially putting up collateral in order to receive a loan against the deposited amount. There are several examples of this in our day to day lives. Auto title loans from large companies like TitleMax are extremely popular with consumers. Consumers are essentially able to use their car as collateral in exchange for a cash payment which can then be used for whatever needs the consumer has. The consumer can continue using their car as long as debt payments are made.
The same concept applies to cryptocurrency CDPs. Consumers are able to put up crypto tokens, such as ETH or stablecoins like DAI or USDC, in exchange for a loan at a specified borrow rate. A consumer would make this trade if they feel like ETH will appreciate at a higher rate of return than what they’re paying against the loan. A trader could use the loan to purchase more ETH, other altcoins, or simply take a vacation. The choice is completely up to them.
Current Platforms Offering CDPs
Since crypto CDPs are still relatively new, there are only a few platforms that offer it. A few of those platforms include dYdX and Compound. As of this writing, the current borrow rates at Compound are as follows:
- ETH – Approximately 2.5%
- DAI – Approximately 13.5%
- USDC – Approximately 10%
Traders may also see a lending rate. The lending rate will offer traders the opportunity to supply a coin like DAI or USDC in exchange for an interest payment. Traders would essentially serve as the banker. Giving the lending rates on DAI and USDC of 10% and 5.5%, respectively, it appears to be a worthwhile opportunity for those who are holding stablecoins in cold storage.
Be Aware of the Risks
“There is no doubt that CDPs will be seen as a really intriguing opportunity by some traders” says Ted Foxworth, President of CryptoRocket, “However, a CDP is not for the faint of heart and involves a rather significant risk depending on one’s risk appetite.”
Given the borrow rates shown above, traders will likely be inclined to borrow against their ETH position. 2.5% is fairly manageable and ETH likely has the most room for price appreciation. But what if the price of ETH goes down?
Since the loan was generated against the ETH position at the price of the loan, CDP holders need to be aware that a significant price drop in ETH could result in the position being liquidated. This is why it is recommended and sometimes even required, that a CDP position be initiated with a liquidation ratio over 150%. This allows flexibility in ETH price fluctuations without resulting in constant liquidations. And, as always, traders should only expose a small % of their overall portfolio to this type of strategy.
It’s great that innovation continues to occur within the crypto space. As more opportunities arise, there are likely to be more and more participants over the coming years. CDPs certainly aren’t for everyone and will likely appeal to traders with the largest risk appetite. It will be fascinating to watch whether more platforms begin to offer CDPs as the market matures.
For the latest cryptocurrency news, join our Telegram!
Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Global Coin Report and/or its affiliates, employees, writers, and subcontractors are cryptocurrency investors and from time to time may or may not have holdings in some of the coins or tokens they cover. Please conduct your own thorough research before investing in any cryptocurrency and read our full disclaimer.
Aluna.Social is a Compelling Social Platform for Crypto Traders and Investors
When one thinks about the social media landscape, the companies that first come to mind are most likely Facebook, Instagram, LinkedIn, and Snapchat. These platforms are a great way to stay connected with friends, families, and colleagues, especially when geographic distance is a factor. But, in addition to just chatting about life in general and sharing pictures, social media can be used to bridge the information gap that exists within the investment community.
Over the last decade, many trading offices have been established in large cities all over the world which allow solo traders and investors to pay a monthly fee in exchange for a workspace. The real benefit to trading in these offices is to participate in the free flow of trading ideas and information. Proprietary trading is one of the most challenging careers to be successful at and the exchange of ideas is almost required in order to succeed. Traders at hedge funds and investment banks work in teams so why shouldn’t remote traders?
While these trading offices are a great way to help bridge the information gap, Aluna.Social may provide an even better way, especially as it relates to cryptocurrency trading.
Aluna.Social, founded by Alvin Lee and Henrique Matias, is a multi-exchange social trading terminal for crypto traders and investors. The goal of the platform is to help newcomers shorten their learning curve,…
CoinFlip Scores Big with BRD Wallet Partnership
As the crypto markets move closer to mass adoption, one of the keys for future success will revolve around attracting as many market participants as possible. While many crypto users are extremely tech oriented, a lot of those on the sidelines are not. The cause of waiting on the sidelines could be due to a variety of reasons such as fear of the unknown, lack of knowledge, age, or a combination of all of the above. In order to entice new users to join the crypto revolution, crypto ATMs are rising up across the country. Of those, the largest and most influential crypto ATM company by a significant margin is CoinFlip.
In early October, CoinFlip announced on its Twitter that it had officially partnered with BRD Wallet to re-introduce their crypto ATM map. Now, BRD wallet users will be able to locate their nearest CoinFlip ATM and receive a 10% discount for both buys and sells. BRD brand awareness is growing quickly within the crypto community thanks to its innovative and entrepreneurial spirit. The team strongly believes in the value of financial freedom and independence, and want to empower people across the world by leveraging the possibilities that Bitcoin and other cryptocurrencies provide.
Cryptocurrencies are already making a huge difference around the world. Citizens of Venezuela, a country devastated by rampant inflation, have been using several cryptocurrencies…
Can Libra help the crypto industry to reach new heights?
The market for cryptocurrencies started with the launch of Bitcoin in 2009, and since then, so many cryptocurrencies have been launched that it gets hard to keep track of them. The crypto market has seen massive growth in the past 3-4 years as it started gaining attention from mass media, which helped in this boom.
From the past 2-3 years, several new cryptocurrency projects were launching in the market. Amid all this, the social media giant – Facebook announced the launch of their cryptocurrency platform, and this news got viral like wildfire. The announcement came forward in June, and the upcoming cryptocurrency is known as Libra, and it’ll come with its dedicated wallet called Calibra.
What is Libra?
Libra is a permissioned blockchain-based digital currency which is being developed under the supervision of Facebook’s vice president, David A. Marcus. The cryptocurrency is under development in partnership with an independent, non-profit member Libra Association. Facebook is the second member of the project, and these companies aim to use Facebook’s user base for the promotion of the digital currency when it is launched. The transactions and the cryptocurrency will be managed and cryptographically entrusted by the Libra Association.
Note: Libra Association was established by Facebook to look after the cryptocurrency and the transactions, and it was founded in Geneva, Switzerland.
The development of…