Here’s Why Interest Rates on Cryptocurrencies Could Be a Game-Changer

Lending and borrowing cryptocurrencies is becoming an increasingly important sub-sector of crypto finance, one that may end up shaping how the underlying assets themselves are valued and priced in the markets. 

While still in its infancy, the growth of crypto lending platforms has given birth to a new type of measuring metric: interest rates, which has the potential to draw in new investors while encouraging the movement of crypto capital out of storage and into markets.

In traditional financial markets, interest rates reveal significant information about the health of the economy and form the basis for almost all asset valuation models. Whether it be for calculating expected return or present and future market value, the interest rate is a key variable based on the lending and borrowing of assets.

When individuals or businesses want to take out a loan, they normally have to agree to pay a percentage of the original amount borrowed back to the lender on top of the principal amount. This is what is called the interest rate.

Interest rates for cryptocurrencies incentivize users to loan out their crypto assets because users can earn a higher return lending their assets than they can storing them in a personal wallet or device. Rates for lending cryptocurrencies coupled with strong demand for borrowing would free previously idle balances of capital for investing, trading and generating new market activity. 

For all the benefits to investors and market activity growth that an active lending and borrowing sector would generate for the cryptocurrency industry, the sector is still in early stages of development. Less than 0.01 percent of the total market capitalization of crypto was deployed in the third quarter of 2019 for collateralizing loans, according to figures by Credmark and Messari. To the nearly $1.5 billion in trade volume being generated daily, only $16 million was generated in crypto loan interest in the third quarter of last year, according to the most…

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