Cryptocurrency has continued to show its supremacy in the finance sector since its inception.
The use of cryptocurrency has freed crypto users from bondage of bank terms when getting a loan.
Knowing how to avoid liquidation of crypto loan collateral is a great knowledge to have when sourcing for a crypto loan.
Unlike the commercial bank strenuous processes before getting a loan, cryptocurrency really simplifies the whole process.
With cryptocurrency, you can get a loan in a matter of seconds.
Some even borrow to stake high yield crypto like cardano.
The interest rate is also not as high as that of the bank and you get charged on an hourly basis.
But to avoid being liquidated as some crypto loan users face, you have to equip yourself with knowledge to avoid liquidation.
In the course of this guide, we will learn of the best ways to avoid liquidation of cryptocurrency loan collateral.
- What Is Liquidation Of Crypto Loan Collateral
- Why Cryptocurrency Liquidation Occurs
- 1) When The Loan LTV is Poor
- 2) To Prevent Loan Issuers From Bankruptcy
- 3) Carelessness From Borrower
- 4) Having Too Many Active Crypto Loans
- 5) Borrowers Have No Understanding Of Liquidation Zones
- 1) Maintain A Good LTV Score
- 2) Reserve Some Funds In Spot Wallet To Maintain Your LTV Score
- 3) Add Collateral To Improve LTV Score
- 4) Use Cryptocurrency Of Reputable Value As Collateral For Crypto Loan
- 5) Avoid Using Cryptocurrencies With Legal Battles For Collateral
- 6) Always Check Your Loan Condition Daily
- 7) Avoid Using Highly Volatile Cryptocurrencies As Collateral For Loan
What Is Liquidation Of Crypto Loan Collateral
Crypto loan liquidation is the process in which a cryptocurrency loan provider terminates the loan of its borrower due to negative crypto price fluctuation.
It is an automated process that triggers itself when the crypto price falls to the liquidation price.
When a crypto user borrows a cryptocurrency, certain terms will be defined on the loan agreement.
Some of the terms will include the liquidation price.
This happens when the crypto loan collateral reduces drastically in value.
When this decrease in value occurs, the loan provider will terminate the loan at a particular price to avoid loss.
The price at which the loan provider terminates the crypto loan is called Liquidation price.
Why Cryptocurrency Liquidation Occurs
Liquidation is a very important tool in the hands of crypto loan providers.
Some of the reasons why cryptocurrency users get liquidated are;
1) When The Loan LTV is Poor
Every cryptocurrency loan provider has a value it permits in the LTV range.
For cryptocurrency loan providers like binance, there is a given value of LTV you have to maintain to avoid liquidation.
This helps you avoid liquidation.
Always try and maintain an LTV score that is below 60%.
The lower the percentage of your LTV, the better your crypto loan records.
Also, the higher the percentage of your LTV, the higher your chance of getting liquidated easily.
To avoid liquidation, always maintain a good LTV score.
2) To Prevent Loan Issuers From Bankruptcy
For crypto loan issuers to avoid bankruptcy, measures like LTV values are used.
When an individual fails to maintain a good score of the LTV, the user gets liquidated before the loss reaches the loan issuer.
This is one of the ways in which crypto issuers stay away from loss resulting from users inability to manage their LTV score well.
3) Carelessness From Borrower
Most of the liquidations that occur could have been avoided.
But they still occur due to the carelessness of the borrower.
This is because most of the borrowers do not make it a point of duty to always check the LTV score.
They just get lazy about the loan condition and forget to check and minitor the LTV scores
When this occurs, the LTV score gets worse and they eventually get liquidated.
If you borrow from a crypto loan issuer, you have to always check the LTV regularly.
If the score is bad, you add more collateral to keep the LTV score in a good level.
If you neglect this, the chances of you getting liquidated is very high if the collateral price drops badly.
4) Having Too Many Active Crypto Loans
Another reason why some users get liquidated is that they have too many active cryptocurrency loans running simultaneously.
When this happens it, it demands extra attention to avoid liquidation.
This is because in the bearish market, the price might change negatively in a very fast manner.
If you are not fast enough to adjust the LTV of all the active loanson time, you risk getting liquidated easily.
5) Borrowers Have No Understanding Of Liquidation Zones
When some crypto borrowers take loans from an issuer, so many do not take time to check the zones of liquidation.
Some still hold the knowledge as used by one of the crypto loan issuers they once used.
This is very wrong as different loan issuers have different zones of liquidation.
To avoid being liquidated, take time to understand the zones of liquidation for a crypto loan that your issuer allows.
This will help you avoid crypto loan liquidation easily.
How To Avoid Liquidation Of Cryptocurrency Loan Collateral
Being liquidated when you borrow a cryptocurrency is a very bad experience.
Some crypto users get liquidated because they did not know how to manage their crypto loan well.
Others get liquidated because they are carefree about maintaining a good LTV score.
The best ways to avoid crypto loan liquidation are explained below. They are;
1) Maintain A Good LTV Score
Before taking a crypto loan, one of the greatest details you have to check is the allowable LTV your crypto loan issuer gives.
Every crypto exchange offers different penalties at different LTV score.
Some crypto loan issuers keep the initial LTV at 50%.
Other loan issuers like binance reduce the entry LTV to about 60%.
Irrespective of this, you still have to make sure that you manage your loan well to avoid falling into the zone that triggers liquidation.
To maintain a good LTV score, you have to always keep an eye on your cryptocurrency loan status.
When you pay solid attention to your loan status, you will not fall prey to liquidation of your crypto loan collateral.
Always try and maintain an LTV score that is not worse than 65%.
2) Reserve Some Funds In Spot Wallet To Maintain Your LTV Score
Another way on how to avoid liquidation of your crypto loan collateral is by having some funds in your spot wallet.
Some crypto loan borrowers always make the mistake of using all their funds for collateral without having some in their spot wallet.
This is a very bad practice in avoiding liquidation of crypto loan collateral.
This is because if you fall into a bad LTV zone, it will be hard for you to instantly add collateral and correct the poor LTV score.
So always make sure that you have some extra funds in same crypto that you use as collateral in your spot wallet.
This will help you to easily manage your crypto loans well without getting liquidated.
3) Add Collateral To Improve LTV Score
A poor LTV score gradually leads you to liquidation.
When you are faced with a poor LTV score, make sure that you immediately add collateral to improve the score.
Do not wait till it gets to worse scores like 80%.
Always act early.
Early actions towards bad LTV score will avoid loss caused by liquidation.
4) Use Cryptocurrency Of Reputable Value As Collateral For Crypto Loan
If you want to prevent liquidation when you borrow a cryptocurrency, use a collateral that has value.
By having value, I mean a crypto that provides significant solution.
Cryptocurrencies like this rarely find themselves in the sharp price spikes.
When you compare the price movement of cryptocurrencies like Cardano to some pump and dump crypto, you will see a clear difference.
Pump and dump cryptocurrencies have a sharp price movement and most times they do not recover in price.
Such coins are very volatile.
This type of volatility makes it very risky to use such cryptocurrencies as collateral for crypto loan.
Just one dump can cause you to face liquidation in a matter of seconds.
Run away from using such coins as collateral for cryptocurrency loan.
Before you choose a crypto as collateral, make sure that you have made a deep study of the coin.
5) Avoid Using Cryptocurrencies With Legal Battles For Collateral
Sometimes a coin may be a crypto of great value but may be facing some legal battle.
When you come across such crypto, completely avoid using them as a collateral.
An example of such a crypto is XRP.
At some point, XRP was having a legal battle with SEC.
This caused the price of XRP to really become unstable due to the effect the fundamentals caused through news.
Some crypto users sold off their XRP out of panic.
Some were busy buying at the low price as they still had firm faith in XRP.
Situations like this make the price of the crypto to be very unstable.
When this occurs, it becomes very risky to use such a crypto as collateral for your crypto loan.
The best collaterals are crypto with good background and without legal drama.
6) Always Check Your Loan Condition Daily
Some users think that the only time to use the loan section is when you get a loan and when you want to repay.
This type of lifestyle has led a lot of users to liquidation they could have avoided.
Accessing the loan section should not end when you get a loan.
You have to always check back on a daily basis.
This will help you in managing your loan well.
Checking your loan condition regularly will give you more information on how best to manage your loan.
If the LTV is poor, you can easily adjust it.
This can be done by adding more collateral to your loan capital.
This will reduce the LTV score thereby keeping your crypto loan in a healthy condition.
This goes a long way in helping you to avoid liquidation of your crypto loan.
7) Avoid Using Highly Volatile Cryptocurrencies As Collateral For Loan
Volatility is a good feature when you are trading a cryptocurrency.
This same feature becomes a nightmare when you are selecting a crypto coin for loan.
This is because if the volatility gets too high like some crypto experience, early liquidation of your loan collateral is not too far.
That is why you must choose a crypto that has some level of price balance when moving not a crypto with a sharp rise and sharp falls.
Conclusion On How To Avoid Liquidation Of Crypto Loan Collateral
Getting a crypto loan has a lot of advantages attached to it.
For some it is a good experience.
For some, it comes out as a bad experience all through.
The bad experience comes into reality when your crypto loan gets liquidated.
This can be caused by one of the reasons discussed in this guide.
Solution have also been provided to help you overcome liquidation totally.
When you practice the lessons explained in this guide, you will have a great experience any time you get a crypto loan.
This will in turn reduce the chances of your crypto loan collateral being liquidated.
If you have any question, use the comment box to notify us.
Read Also: How To Use Binance Auto Subscribe
Read Also: Transfer From Coinbase To Coinbase Pro